Answer 1)
Since at 40% debt and 60% equity, WACC is minimized and stock price is maximized, the 40(debt):60(equity) is the optimal capital structure for Jackson.
Answer 2)
a. Expected EPS for Firm C: E(EPSC) = 0.1($2.40) + 0.2($1.35) + 0.4($5.10) + 0.2($8.85) + 0.1($12.60) = $0.24 + $0.27 + $2.04 + $1.77 + $1.26 = $5.58. b) According to the standard deviations of EPS, Firm B is the least risky, while C is the riskiest.However,this analysis does not consider portfolio effects—if C’s earnings increase when most other companies’ decline (that is, its beta is low), its apparent riskiness would ...
