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Check My Work Click here to read the eBook: Basic Definitions Click here to read the eBook: The Cost of Retained Earnings, rs WACC AND PERCENTAGE OF DEBT FINANCING Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at re-12%, and its common stock currenty pays a $2.0 dividend share 00-S2.00). The stock's price is currently S23.So, its dividend is expected to grow at a constant rate of 8% per year, its tax rate is 35%, and its WACC is 12.05%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places Check My Wark 30

Explanation / Answer

STEP1 CALCULATION OF COST OF EQUITY Stock Price=$23 $23 Current dividend=$2.00 $2 Dividend growth rate=8% 0.08 Next years dividend=2*1.08= $       2.16 Cost of equity =R 23=2.16/(R-0.08) R=(2.16/23)+0.08= 0.173913 Cost of equity =R= 17.39% STEP2 CALCULATION OF COST OF DEBT Interest rate of debt=12% 0.12 Tax Rate=35% 0.35 After tax cost of debt=0.12*(1-0.35) 0.078 After tax cost of debt 7.80% STEP3 CALCULATION OF PERCENTAGE OF DEBT Assume,Weight of Debt=Wd Weight of Equity=(1-Wd) Weighted Average Cost of Capital(WACC): Wd*Cost of Debt+(1-Wd) *Cost of Equity WACC=12.05% Wd*7.80+(1-Wd)*17.39=12.05 (17.39-7.80)*Wd=17.39-12.05 9.59 9.59*Wd=5.34 5.34 Wd=5.34/9.59= 0.55683 Percentage of Debt in the Capital structure 55.68%

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