Hook Industries\' capital structure consists solely of debt and common equity. I

Question

Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at rd = 10%, and its common stock currently pays a $3.00 dividend per share (D0 = $3.00). The stock's price is currently $29.00; its dividend is expected to grow at a constant rate of 9% per year; its tax rate is 35%; and its WACC is 14.00%.

What percentage of the company's capital structure consists of debt? Round your answer to two decimal places. [HINT: percentages of debt and common equity should add to 1. wc + wd =1]

Explanation / Answer

Pretax cost of debt = 10%

Cost of debt =(1-0.35)*10% =6.5%

Cost of equity = g + Div(1+g)/P =9% +(3*1.09)/29 =0.202759 =20.27%

We =Percentage of Equity

WD =Percentage of Debt

We+ WD= 1

WACC = We*20.27% +WD*6.5%

14%= We*20.27% +(1-We)*6.5%

0.1377*We = 14% - 6.5% =0.075

We = 0.544662

WD= 1-0.544662 = 0.455338

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