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

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Finance

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.

Answer & Explanation Solved by verified expert
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 = (w*0.066)+((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.

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