Question

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at ra = 9%, and its common stock currently pays a $3.00 dividend per share (Do = $3.00). The stock's price is currently $23.50, its dividend is expected to grow at a constant rate of 6% per year, its tax rate is 25%, and its WACC is 13.30%. 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

Current price= D0*(1+growth rate)/(Cost of equity-Growth rate)
23.5= 3*(1+6%)/(Cost of equity-6%)
(Cost of equity-6%)= 3*(1+6%)/23.5    
Cost of equity=0.135319149+6%=0.195319149
Cost of debt=9%
WACC=13.3%
As the capital structure consist of only debt and equity, Weight of debt+Weight of equity=1
Weight of equity=1-Weight of debt

WACC=(Weight of equity)*(Cost of equity)+(Weight of debt)*(Cost of debt)*(1-tax rate)
WACC=(Weight of equity)*(0.195319149)+(Weight of debt)*(9%)*(1-25%)
WACC=(1-Weight of debt)*(0.195319149)+(Weight of debt)*(9%)*(1-25%)
13.3%=1*(0.195319149)-Weight of debt*(0.195319149)+(Weight of debt)*0.0675
13.3%-0.195319149=Weight of debt*(-0.195319149+0.0675)
-0.062319149=Weight of debt*(-0.127819149)

Weight of debt=(-0.062319149)/(-0.127819149)=0.487557 or 48.76% (Rounded to two decimal places)

Answer: Weight of debt is 48.76%