Question

eBook Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at re 10 % , and its common stock currently pays a $2.75 dividend per share (Do $2.75). The stock's price is currently $24.00, its dividend is expected to grow at a constant rate of 8% per year, its tax rate is 25 %, and its WACC is 16.00 % . What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places 20.38 %

Answer 1

rE = [{D0 * (1 + g)} / P0] + g

= [{$2.75 * (1 + 0.08)} / $24] + 0.08

= 0.12375 + 0.08 = 0.20375, or 20.375%

wD + wE = 1

wD = 1 - wE

WACC = [wD * rD * (1 - t)] + [wE * rE]

16% = [(1 - wE) * 10% * (1 - 0.25)] + [wE * 20.375%]

16% = [(1 - wE) * 7.50%] + [wE * 20.375%]

16% = 7.50% - [wE * 7.50%] + [wE * 20.375%]

16% - 7.50% = [wE * 12.875%]

wE = 8.50% / 12.875% = 0.6602, or 66.02%

wD = 1 - wE = 1 - 0.6602 = 0.3398, or 33.98%

so, Debt consists 33.98% of the capital structure.