Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at...

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Hook Industries's capital structure consists solely of debt andcommon equity. It can issue debt at rd = 11%, and its common stockcurrently pays a $3.00 dividend per share (D0 = $3.00). The stock'sprice is currently $34.00, its dividend is expected to grow at aconstant rate of 9% per year, its tax rate is 40%, and its WACC is15.55%. What percentage of the company's capital structure consistsof debt? Do not round intermediate calculations. Round your answerto two decimal places.

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4.1 Ratings (841 Votes)

Step-1:Calculation of cost of equity

	As per dividend discount model,

	Cost of equity	=	(D0*(1+g)/P0)+g		Where,
		=	(3.00*(1+0.09)/34.00)+0.09		D0	$ 3.00
		=	18.62%		g	9%
					P0	$ 34.00

Step-2:Calculation of after tax cost of debt

	After tax cost of debt	=	Before tax cost of debt*(1-Tax rate)
		=	11%*(1-0.40)
		=	6.60%

Step-3:Calculation of weight of debt and equity

	Suppose weight of debt is "w" and so weight of equity is "1-w".


	WACC	=	Sum of weighted tax of each component
	0.1555	=	(w0.066)+((1-w)0.1862)
	0.1555	=	0.066w+0.1862-0.1862w
	0.1555	=	-0.1202w+0.1862
	0.1202w	=	0.1862-0.1555
	0.1202w	=	0.0307
	w	=	0.255408

	so,
	1-w	=	0.744592

Thus,

Capital structure consists of debt with				25.54%

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Hook Industries's capital structure consists solely of debt andcommon equity. It can issue debt at rd = 11%, and its common stockcurrently pays a $3.00 dividend per share (D0 = $3.00). The stock'sprice is currently $34.00, its dividend is expected to grow at aconstant rate of 9% per year, its tax rate is 40%, and its WACC is15.55%. What percentage of the company's capital structure consistsof debt? Do not round intermediate calculations. Round your answerto two decimal places.

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at...

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