Question

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 $3.25 dividend per share (D0 = $3.25). The stock's price is currently $30.75, its dividend is expected to grow at a constant rate of 6% per year, its tax rate is 25%, and its WACC is 14.35%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places. %

Excel answer

Answer 1

27.27%

WACC	=	(Wd*Kd)+(We*Ke)		Where,
0.1435	=	(w*0.0675)+((1-w)*0.1720)	Wd	=	Weight of debt	=	w
0.1435	=	(0.0675w)+(0.1720-0.1720w)	Kd	=	After tax cost of debt	=	6.75%
0.1435	=	-0.1045w+0.1720		We	=	Weight of equity	=	1-w
0.1045w	=	0.1720-0.1435		Ke	=	Cost of Equity	=	17.20%
0.1045w	=	0.0285
w	=	0.272727
so, 1-w	=	0.727273
So,
Weight of debt	=	27.27%
Working:
After tax cost of debt	=	Before tax cost of debt*(1- Tax Rate)
	=	9%*(1-0.25)
	=	6.75%
Cost of Equity	=	(D0*(1+g)/P0)+g	Where,
	=	(3.25*(1+0.06)/30.75)+0.06	D0	=	$       3.25
	=	17.20%		g	=	6%
				P0	=	$    30.75