Question

# WACC AND PERCENTAGE OF DEBT FINANCING Hook Industries's capital structure consists solely of debt and common...

WACC AND PERCENTAGE OF DEBT FINANCING

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 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.

%

 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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