Question

6. Problem 10.11 (WACC and Percentage of Debt Financing) eBook Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 10%, and its common stock currently pays a $2.00 dividend per share (Do = $2.00). The stock's price is currently $28.25, its dividend is expected to grow at a constant rate of 6% per year, its tax rate is 25%, and its WACC is 12.90%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

After tax cost of Debt Before tax cost of debt*(1-tax rate) 0.10*(1-0.25) 7.50% 7.50% 1111 Cost of Equity D1 DO*(1+g) (D1/PO)+g 2*(1+0.06) (2.12/28.25) +0.06 = Ke 2.12 0.135044248 13.50% weight cost Debt Equity product 0.075 0.075x 0.135044248 0.135044248-0.135044248x 12.90% 1-x WACC 0.129 0.075x+0.135044248-0.135044248x 0.135044248-0.129 0.006044248 = 0.135044248x-0.075x 0.0600442x 0.100663231 0.899336769 1-x cost product weight 10.07% 89.93% F Debt Equity 10.07% 7.50% 13.50% 0.007549742 0.121450257 0.129 Debt Weight 10.07%