Question

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.

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