Question

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at r_d = 8%, and its common stock currently pays a $4.00 dividend per share (D₀ = $4.00). The stock's price is currently $32.25, its dividend is expected to grow at a constant rate of 6% per year, its tax rate is 35%, and its WACC is 13.55%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

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The assets of Dallas & Associates consist entirely of current assets and net plant and equipment, and the firm has no excess cash. The firm has total assets of $2.9 million and net plant and equipment equals $2.4 million. It has notes payable of $140,000, long-term debt of $751,000, and total common equity of $1.55 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and common equity, so it has no preferred stock on its balance sheet.

Write out your answers completely. For example, 25 million should be entered as 25,000,000. Negative values, if any, should be indicated by a minus sign. Round your answers to the nearest dollar, if necessary.

1. What is the company's total debt?
     $  
2. 
   
3. What is the amount of total liabilities and equity that appears on the firm's balance sheet?
   $  
4. 
   
5. What is the balance of current assets on the firm's balance sheet?
   $  
6. 
   
7. What is the balance of current liabilities on the firm's balance sheet?
   $  
8. 
   
9. What is the amount of accounts payable and accruals on its balance sheet? (Hint: Consider this as a single line item on the firm's balance sheet.)
   $  
10. 
    
11. What is the firm's net working capital? If your answer is zero, enter "0". Negative value, if any, should be indicated by a minus sign.
    $  
12. 
    
13. What is the firm's net operating working capital?
    $  
14. 
    
15. What is the monetary difference between your answers to part f and g?
    $  
    
    What does this difference indicate?

Answer 1

Answer to Question 1:

Equity:
Expected Dividend = Current Dividend * (1 + Growth Rate)
Expected Dividend = $4.00 * 1.06
Expected Dividend = $4.24

Cost of Equity = Expected Dividend / Current Price + Growth Rate
Cost of Equity = $4.24 / $32.25 + 0.06
Cost of Equity = 0.1315 + 0.06
Cost of Equity = 0.1915 or 19.15%

Debt:
Cost of Debt = 8%
After Tax Cost of Debt = 8% * (1 – 0.35)
After Tax Cost of Debt = 5.20%

Let Weight of Debt be “x”
Weight of Equity will be “1 –x”

WACC = (Weight of Debt * After Tax Cost of Debt) + (Weight of Equity * Cost of Equity)
13.55% = (x * 5.2%) + ((1 – x) * 19.15%)
13.55% = 5.2x% + 19.15% - 19.15x%
13.95x% = 5.6%
x = 0.4014

Therefore, the percentage of debt in Capital structure is 40.14%