Question

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at r_d = 10%, and its common stock currently pays a $4.00 dividend per share (D₀ = $4.00). The stock's price is currently $29.50, its dividend is expected to grow at a constant rate of 9% per year, its tax rate is 25%, and its WACC is 15.60%. 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

WACC= We*Ke+Wd*Kd(1-t)

We= Weight in Equity

Wd= Weitht in Debt

Ke= Cost of Equity

Kd= Cost of Debt

t= Tax Rate

Ke can be calculated as follows:

Po= D1/Ke-g

Po = Price of the share

D1= Diviend at the end of year 1

29.5= D0(1+g)/Ke-g

29.5= 4(1.09)/Ke-0.09

29.5(Ke-0.09) = 4.36

Ke-0.09 = 4.36/29.5 = 0.1477

Ke= 0.1477+0.09

Ke = 23.78%

WACC= We*Ke+Wd*Kd(1-t)

Let we be the X

wd be the 1-X

15.6= (X*23.78%)+(1-X) 10%(1-0.25)

15.6 = 23.78X+7.5-7.5X

15.6-7.5= 16.28X

8.1 = 16.28X

X= 8.1/16.28

X= 49.75 %

Weights of equity We= 49.75%

Weights of Debt (1-X) = 51.25%

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