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Hook Industries’s capital structure consists solely of debt and common equity. It can issue debt at , and its common stock currently pays a $2.00 dividend per share . The stock’s price is currently $24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company’s capital structure consists of debt?

Respuesta :

Answer: weight of debt is 20%

Explanation:

The question is incomplete we need the cost of debt before tax. lets assume cost of debt (Rd) before tax is 11%

Weight debt = Wd

weight of equity = We

tax = 35%

dividends = d = $2

price = P = 24.75

WACC = (We x Re) + (Wd x Rd)(1 - t)

cost of equity

using Gordon growth model

required rate of return = (D(1+g)/P) + g

required rate of return = (2 x (1+0.07)/24.75) +0.07

required rate of return(Re) = 15.65%

calculating weight of debt

WACC = (We x Re) + (Wd x Rd)

WACC = (1 -Wd) x Re + (Wd x Rd)

O.1395  = (1 - Wd)(0.1565) + (Wd )(0.11)(1-0.35)

0.1395 =0.1565 - 0.1565Wd + 0.0715Wd

0.1395 = 0.1565 - 0.085Wd

Wd = (0.1565 - 0.1395)/0.085

Wd = 0.2 = 0.2 x 100 = 20%

weight of debt is 20%

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