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 = 12%, and its common stock currently pays a $3.50 dividend per share Do $3.50 The stock's price is currently $23.75, its dividend is expected to grow, at a constant rate of 4% per year its tax ra 6 and ts M C s Z1 . t percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places

Explanation / Answer

WACC = (Weight of debt*After tax cost of debt) + (Weight of Equity*Cost of equity)

Let weight of debt be x

Weight of equity = (1-x)

After tax cost of debt = 12% (1-.40) = 7.2%

Cost of equity = D1/P0 + g

D1 = dividend after year 1 = D0(1+g)

D1 = $3.50(1+.04) = $3.64

P0 = $23.75

g = 4%

Cost of equity = $3.64/$23.75 + 4%

= 15.33% + 4% = 19.33%

12.10% = (x*7.2%) + ((1-x)*19.33%)

12.10% = 7.2x% + 19.33% - 19.33x%

12.13x% = 7.23%

x = 59.60%

Hence debt is 59.60%

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