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 (D₀ = $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%