WACC and Percentage of Debt Financing Hook Industries\' capital structure consis
ID: 2642279 • Letter: W
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 $3.25 dividend per share (D0 = $3.25). The stock's price is currently $21.75, its dividend is expected to grow at a constant rate of 6% per year, its tax rate is 40%, and its WACC is 13.90%. What percentage of the company's capital structure consists of debt? Round your answer to two decimal places.
Cost of Common Equity with Flotation
Ballack Co.
Explanation / Answer
Cost of Debt (Kd) = 9% (1-0.40) = 5.40% Cost of Equity (Ke) 21.84% Using Dividend Discount model Ke = (D1/P0 ) + g D1 = 3.25 * 106% = $3.445 P0 = $21.75 g= 6% = 0.06 Hence Ke = (3.445/21.75 )+ 0.06 = 21.84% WACC = Ke*We + Kd*Wd Wd= Weight of Debts We= Weight of Equity = 1-Wd We know WACC is 13.90% Hence 13.90% = 21.84%*(1-Wd) + 5.40%*Wd Hence Wd = 0.4829 So we can say that Percetage of Debt is 48.30%
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