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Fundamentals of Financial Manageme...
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Fundamentals of Financial Manageme...
WACC AND PERCENTAGE OF DEBT FINANCING Hook Industries’s capital structure consists solely of debt and common equity. It can issue debt at rd = 11%, and its common stock currently pays a $2.00 dividend per share (D0 =$2.00). The stock’s price is currently $24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company's capital structure consists of debt?
To determine: The percentage of the company’s capital structure consists of debt.
Introduction:
Weighted Average Cost of Capital (WACC):
It is the weighted average cost of all the sources through which the firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as the firm’s cost of capital. The company raises money through various sources such as common stock and preference share debt. The WACC is calculated by taking the relative weight of each item of capital structure.
Formula to calculate the WACC is,
Where,
Given information:
WACC is 13.95%.
Cost of debt is 11%
Cost of equity is 15.65% (working note).
Tax rate is 35%.
The company does not have any preferred stock. The formula to calculate WACC is,
Where,
-
-
-
-
- t is tax rate.
Substitute, 0.1395 for WACC, 0.1565 for
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