Question

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.

Answer 1

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%