Question

**WACC AND PERCENTAGE OF DEBT FINANCING**

Hook Industries's capital structure consists solely of debt and
common equity. It can issue debt at r_{d} = 8%, and its
common stock currently pays a $4.00 dividend per share
(D_{0} = $4.00). The stock's price is currently $23.75, its
dividend is expected to grow at a constant rate of 7% per year, its
tax rate is 40%, and its WACC is 14.80%. 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

As per DDM |

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate) |

23.75 = 4 * (1+0.07) / (Cost of equity - 0.07) |

Cost of equity% = 25.02 |

After tax rate = YTM * (1-Tax rate) |

After tax rate = 8 * (1-0.4) |

After tax rate cost of debt= 4.8 |

Cost of Capital = Weight of Equity*Cost of Equity+Weight of After tax Debt*Cost of After tax Debt |

14.8 = 25.02*Weight of Equity+4.8*(1-weight of Equity) |

Weight of Equity = 0.4946 |

Weight of After tax Debt =1-weight of Equity=1-0.4946=50.54% |

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