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 = 11%, and its common stock currently pays a \$3.00 dividend per share (D0 = \$3.00). The stock's price is currently \$25.75, its dividend is expected to grow at a constant rate of 4% per year, its tax rate is 40%, and its WACC is 15.85%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

Cost of Debt After TAx = 11 % * ( 1-0.4)

= 6.6%

Cost of Equity =[ Expected Dividend / Current Price ] + growth rate

= [ (\$ 3* 1.04) / \$ 25.75] +0.04

= 0.161165048

Let Debt be \$ x

Equity be \$ y

Total = \$ ( x+ y)

WACC = Respective Cost * Respective Weights

0.1585 = x/ (x+y) * 0.066 + y/(x+y) * 0.161165048

0.1585 (x+y)= 0.066x + 0.161165048 y

0.1585 x + 0.1585 y = 0.066x +0.161165048 y

Hence, x = [0.161165048 y - 0.1585y] / (0.1585 - 0.066)

= 0.028811335 y

Total = x+y

= 1.028811335 y

Hence Weight of Debt = 0.028811335 y / 1.028811335 y

= 2.80%

Hence the correct answer is 2.80%

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