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    samip13's Avatar
    samip13 Posts: 1, Reputation: 1
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    #1

    May 14, 2012, 05:36 PM
    WACC and Percentage of Debt Financing
    Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at r= 11% and its common stock currently pays a $2.00 divident per share (D=$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?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    May 15, 2012, 04:43 AM
    You'll first use the constant-growth model to determine the market return on the company's equity. Normally the constant-growth model is used to derive the current stock value, but when you're given the value and the return is the unknown, you can solve the equation for the return.

    The problem gives you debt's market return, and you've derived equity's market return as per above. With those two values in hand you can then determine what relative proportions of debt and equity result in the given WACC.
    arunavcd's Avatar
    arunavcd Posts: 89, Reputation: 3
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    #3

    May 28, 2012, 06:00 PM
    Quote Originally Posted by samip13 View Post
    Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at r= 11% and its common stock currently pays a $2.00 divident per share (D=$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?

    Mathematical solution required through the WACC formula? Confused as the percentage of none (debt or equity) is given.
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #4

    May 29, 2012, 03:20 AM
    Right; the problem is asking you to find the percentage of debt and equity.

    In most situations using the WACC formula, you know the percentages of debt and equity, and you know their respective returns. From these knowns you derive the WACC.

    In this case, though, the knowns are the WACC and the returns, and you're asked to derive the percentages.
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