Question

# WACC and Percentage of Debt Financing Hook Industries' capital structure consists solely of debt and common...

WACC and Percentage of Debt Financing Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at rd = 9%, and its common stock currently pays a \$2.25 dividend per share (D0 = \$2.25). The stock's price is currently \$22.00, its dividend is expected to grow at a constant rate of 4% per year, its tax rate is 40%, and its WACC is 13.30%. What percentage of the company's capital structure consists of debt? Round your answer to two decimal places.

 As per DDM Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate) 22 = 2.25 * (1+0.04) / (Cost of equity - 0.04) Cost of equity% = 14.64 After tax rate of debt = YTM * (1-Tax rate) After tax rate = 9 * (1-0.4) After tax rate = 5.4 Market value of Capital = Weight of Bond*Market value of Bond+Weight of Equity*Market value of Equity 13.3 = 5.4*Weight of Bond+14.64*(1-weight of Bond) Weight of Bond = 0.145021645 = 14.5%

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