Backto Assignment Attempts: Keep the Highest: 6. Problem 10.11 Problem 10-11 WAC
ID: 2782795 • Letter: B
Question
Backto Assignment Attempts: Keep the Highest: 6. Problem 10.11 Problem 10-11 WACC and Percentage of Debt Financing Hook Industries' capital structure consists solely of debt and common equity, It can issue debt at r 129%, and its common stock currently pays a $3.75 dividend per share (Do $3.75). The stock's price is currently $24.50, its dividend is expected to grow at a constant rate of 4% per year, its tax rate is 35%, and its WACC is 15.30%. What percentage of the company's capital structure consists of debt? Round your answer to two decimal places.Explanation / Answer
Cost of debt after tax=12(1-0.35)=7.8%
Cost of equity=(Dividend for next period/Current price)+Growth rate
=(3.75*1.04)/24.5+0.04=19.9183673%(Approx)
Let debt be$x
Equity be $y
Total=$(x+y)
WACC=Respective costs*respective investment weights
0.158=(x/(x+y)*0.078)+(y/(x+y)*0.199183673)
0.158(x+y)=0.078x+0.199183673y
0.158x+0.158y=0.078x+0.199183673y
x=y(0.199183673-0.158)/(0.158-0.078)
=0.514795918y
Hence total=x+y
=1.514795918y
Hence weight of debt=0.514795918y/1.514795918y
=33.98%(Approx).
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