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 = 8%, and its common stock currently pays a $3.00 dividend per share (D0 = $3.00). The stock's price is currently $23.75; its dividend is expected to grow at a constant rate of 6% per year; its tax rate is 40%; and its WACC is 14.30%. 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

Price=(Do*(1+g))/(r-g)

23.75=(3*1.06)/(r-0.06)

r-0.06=3.18/23.75

r=19.39%

WACC=wc*r+wd*cd*(1-t)

14.30%=(1-wd)*19.39%+wd*8%*(1-40%)

14.30%=19.39%-19.39%*wd+4.8%wd

14.59%wd=5.09%

wd=34.9% or 0.35 is weight of debt

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