Question

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at...

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 10%, and its common stock currently pays a $4.00 dividend per share (D0 = $4.00). The stock's price is currently $33.25, its dividend is expected to grow at a constant rate of 8% per year, its tax rate is 35%, and its WACC is 13.10%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

Homework Answers

Answer #1

Cost of Equity as per dividend discount model =
D0 * ( 1+ growth rate) /(Price of Share) + growth = 4 * (1 + 8%)/33.25 + 8% = 20.99248%

WACC =Cost of Debt * (1-tax rate) Debt/Total value + Cost of Equity * (1 -Debt/Total Value)
13.1% = 10% * (1 - 35%) Debt/Total value + 20.99248% ( 1 - Debt/Total value)
13.1% = 0.065 Debt/Total value + 0.2099248 - 0.2099248 Debt/Total Value
Debt/Total Value = 0.54459 or 54.46%
Percentage of Debt = 54.46%

Best of Luck. God Bless

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