WACC AND PERCENTAGE OF DEBT FINANCING Hook Industries\'s capital structure consi

Question

WACC AND PERCENTAGE OF DEBT FINANCING

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 9%, and its common stock currently pays a $3.00 dividend per share (D0 = $3.00). The stock's price is currently $26.50, its dividend is expected to grow at a constant rate of 4% per year, its tax rate is 35%, and its WACC is 15.55%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

%___

Explanation / Answer

Cost of equity=(D1/Current price)+Growth rate

=(3*1.04)/26.5+0.04

=15.7735849%

Let debt be $x

Equity be $y

Total=$(x+y)

After tax cost of debt=9*(1-tax rate)

9(1-0.35)=5.85%

WACC=Respective costs*Respective weights

15.55=( 15.7735849*y)/(x+y)+(5.85x/(x+y))

15.55*(x+y)=15.7735849y+5.85x

15.55x+15.55y=15.7735849y+5.85x

x=(15.7735849-15.55)y/(15.55-5.85)

=0.023049989y

Total=x+y

=1.023049989y

Hence weight of debt=x/1.023049989y

=0.023049989y/1.023049989y

=2.25%(Approx).

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