Question

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 12%, and its common stock currently pays a $4.00 dividend per share (D0 = $4.00). The stock's price is currently $28.50, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 25%, and its WACC is 15.50%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

The % is computed as follows:

WACC = cost of debt x (1 - tax rate) x weight of debt + cost of equity x (1 - weight of debt)

cost of equity is computed as follows:

= [ [ D0 x (1 + growth rate) ] / current price ] + growth rate

= [ [ $ 4 x 1.07 ] / $ 28.50 ] + 7%

= 0.220175439

So, the weight of debt will be as follows:

0.1550 = 0.12 x 0.75 x weight of debt + 0.220175439 x (1 - weight of debt)

0.1550 = 0.09 x weight of debt + 0.220175439 - 0.220175439 weight of debt

0.1550 = 0.220175439 - 0.130175439 weight of debt

weight of debt = (0.220175439 - 0.1550) / 0.130175439

weight of debt = 50.07% Approximately

Do ask in case of any doubts.