Final answer:
The optimal capital structure for Wolves Entertainment Company appears to be option D with a debt of 60%, equity of 40%, an EPS of $3.18, a stock price of $31.20, and a cost of debt of 4%. This structure offers a good balance between the advantages of debt and equity while maximizing the stock price and providing a significant EPS. The correct option is d.
Step-by-step explanation:
When considering the optimal capital structure for Wolves Entertainment Company, we should look for the structure that maximizes the stock price, as this is typically aligned with the best interests of the stockholders. The choices provided include various blends of debt and equity, along with their corresponding earnings per share (EPS) and stock price. We can rule out option B immediately as it has a lower stock price despite a higher EPS. Option A has a lower stock price and EPS than other options, so it is suboptimal. Option C has the highest stock price, but option E has the highest EPS; however, option D provides a good balance with a high stock price and a substantial EPS.
We need to balance the benefits of debt (tax shields) against the costs (bankruptcy risk and higher interest rates), hence a moderate amount of leverage should be optimal. The cost of debt is also a consideration, as excessive debt costs can reduce the value to shareholders. Given the information, the best option seems to be option D, which provides a relatively high stock price of $31.20 and a reasonable EPS of $3.18, with a moderate cost of debt at 4.0%. This indicates a balanced approach to leverage that likely maximizes shareholder value.