Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 11%, and its common stock currently pays a $3.75 dividend per share (D0 = $3.75). The stock's price is currently $33.75, its dividend is expected to grow at a constant rate of 9% per year, its tax rate is 25%, and its WACC is 14.50%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.
The % of the company's debt is computed as shown below:
Cost of equity is computed as follows:
= current dividend ( 1 + growth rate ) / current stock price + growth rate
= $ 3.75 ( 1 + 0.09 ) / $ 33.75 + 0.09
= 0.2111 or 21.11%
The weight of equity can be expressed as:
weight of equity + weight of debt = 1
weight of equity = 1 - weight of debt
So the company's debt percentage will be:
WACC = cost of debt x ( 1 - tax rate ) x weight of debt + cost of equity x weight of equity
0.1450 = 0.11 x ( 1 - 0.25 ) x weight of debt + 0.2111 x ( 1 - weight of debt )
0.1450 = 0.0825 weight of debt + 0.2111 - 0.2111 weight of debt
0.1286 weight of debt = 0.0661
weight of debt = 51.40%
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Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at...