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 $3.25 dividend per share (D0 = $3.25). The stock's price is currently $20.00, its dividend is expected to grow at a constant rate of 8% per year, its tax rate is 35%, and its WACC is 15.95%. 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

Let percentage of the company's capital structure consists of debt is y

WACC = cost of equity* wght of equity+ cost of debt*wght of debt*(1-t)

15.95%=25.55 %*(1-y)+12%*(1-35%)*y

              =25.55 %*(1-y)+12%*65%*y

              =25.55%-25.55%y+7.8%y

y17.75%=9.6%

y=9.6%/17.75%=54%

Hence the 54% company's capital structure consists of debt