Question

eBook Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd - 9%, and its common stock currently pays a $2.50 dividend per share (Do - $2.50). The stock's price is currently $30.25, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 25%, and its WACC IS 13.45%. 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

Cost of equity = (D1 / price) + growth rate

Cost of equity = [2.5(1 + 7%) / 30.25] + 0.07

Cost of equity = [0.08843] + 0.07

Cost of equity = 0.15843 or 15.843%

let weight of debt be X

weight of equity be 1 - X

WACC = Weights * costs

0.1345 = X*0.09*(1 - 0.25) + (1 - X)*0.15843

0.1345 = X*0.0675 + 0.15843 - X0.15843

0.09093X = 0.02393

X = 0.2632 or 26.32%

Percentage is 26.32%