WACC AND PERCENTAGE OF DEBT FINANCING Hook Indust es\'s capital equity. It can i

Question

WACC AND PERCENTAGE OF DEBT FINANCING Hook Indust es's capital equity. It can issue debt at r -996 and its common stock currently pays a $3.50 d ide d per share Do 3.50 The stock's pnce s currently $22.50 s dv dend is expected to grow at a constant rate of 4% per year, its tax rate is 40% and its WACC is 13.45% 'What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places. structure consists solely of debt and common 2.50, its dividend is expected to grow

Explanation / Answer

Cost of equity=(Dividend for next period/Current price)+Growth ratr

=(3.5*1.04)/22.5+0.04

=0.201778(Approx)

Cost of debt after tax=9(1-0.4)=0.054

Let debt be $x

EQuity be $y

Total=$(x+y)

WACC=Respective costs*Respective weights

0.1345=(0.054x/(x+y)+(0.201778y/(x+y)

0.1345(x+y)=0.054x+0.201778y

0.1345x+0.1345y=0.054x+0.201778y

Hence x=(0.201778-0.1345)y/(0.1345-0.054)

=0.835748792y

Total=1.835748792y

Weight of debt=

=0.835748792y/1.835748792y
=45.53%(Approx).

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