From the information below, select the optimal capital structure for Mountain High Corp.
A) Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50
B) Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90
C) Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20
D) Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40

Question

Quizplus · Accepted Answer

The optimal capital structure for a company depends on various factors, such as risk tolerance, cost of capital, and growth opportunities. In this case, we can observe that as the debt proportion increases, the EPS also tends to increase. However, beyond a certain point, the increased financial risk associated with higher debt levels may not be worth the additional EPS.

Option C seems to strike the right balance between debt and equity, with a debt-to-equity ratio of 60:40. This capital structure results in the highest EPS of $3.18 while still having a relatively high stock price of $31.20. This indicates that the market is valuing the company positively even with a higher debt load. Therefore, option C is the optimal choice for Mountain High Corp.

From the Information Below, Select the Optimal Capital Structure for Mountain