Question

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at r_d = 11%, and its common stock currently pays a $4.00 dividend per share (D₀ = $4.00). The stock's price is currently $35.00, its dividend is expected to grow at a constant rate of 8% per year, its tax rate is 25%, and its WACC is 14.40%. 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

Solution:-

Weight of Debt and Weight of Equity is equals to One.

Wd + We = 1

We = 1 - Wd

First Calculate Cost of Equity-

Cost of Equity =

Cost of Equity =

Cost of Equity = 20.34%

To Calculate  percentage of the company's capital structure consists of debt-

WACC = Cost of Debt * (1-tax) * Wd + Cost of Equity * We

WACC = Cost of Debt * (1-tax) * Wd + Cost of Equity * (1-wd)

0.144 = 0.11 * (1-0.25) * Wd + 0.2034 * (1-Wd)

0.144 = 0.0825 Wd + 0.2034 - 0.2034 Wd

0.144 - 0.2034 = 0.0825 Wd - 0.2034 Wd

-0.0594 = -0.1209 Wd

Wd =

Wd = 49.13%

We = 1 - Wd = 1 - 0.4913 = 50.87%

Percentage of the company's capital structure consists of debt is 49.13%

If you have any query related to question then feel free to ask me in a comment.Thanks.