Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS 1 ) and k s for various capital...

1. Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS₁) and k_s
   for various capital structures are given below.

Debt/Total Assets (%)                     Expected EPS (RM)                 k_s
(%)

      20%                                                    $2.50                              15.0%

      30                                                        3.00                              15.5

      40                                                        3.25                              16.0

      50                                                        3.75                              17.0

      70                                                        4.00                              18.0

Required:

What is the optimal capital structure for ZPC? Show all of your working and explain your answer.  (Hints: Capital structure is at the optimum level when WACC is at the lowest; hence ZPC stock price is at the highest – to apply DCF method here)