Question

mideploymentld-560630334534630449872346938eISBN 97813372992208id-4574416 11225368 INDTAP 10 End-of-Chapter Problems Brigham Chapter 10 End-of-Chapter Problems Q Search this course et Sore 12.50% Check My Work (a remaininge) eBook Problem 10-11 WAcc and Percentage of Debt Finanoing Hook Industrer capta structure consists solely of debt and commen equty, t can issue debt at 4-9%, adis common stock arently pays a sus dodend per share 0-3125). The stock's prce is currently S 26.50, ts dividend n expected to gre at a constant rate of 5% per yea, ts tante n 35%, ad is wac 15.45%. what percentage of the company's capta. structure corssts of dett? Round your aswer to two domal places. Check My Work (1 remaining) H G NM

Answer 1

Using constant growth dividend discount model, let us calculate the required return or cost of equity

Div Po=- Po Price of Stock Divi = Estimated Dividends for Next Period r = Required Rate of Return g Grouth Rate

3.25 1+0.05) r-0,05 26.50

r - 0.05 = 12.88%

r = 17.88%

WACC = Pretax cost of debt * (1 - Tax) * Weight of debt + Cost of Equity * Weight of equity

Assume weight of debt = W. SO weight of Equity would be 1-W

15.45% = 9% * W * (1 - 35%) + (1 - W) * 17.88%

15.45% = 5.85% * W + 17.88% - 17.88% * W

12.03% * W = 2.43%

W = 20.20%

Weight of debt = 20.20%