Crypton electronics has a capital structure consisting of 36% common stock and 6

Question

Crypton electronics has a capital structure consisting of 36% common stock and 64% debt. A debt issue of $1,000 par value, 6.3% bonds that mature in 15 years and pay annual interest will sell $971. Common stock of the firm is currently selling for $30.73 per share and the firm expects to pay $2.27 dividend next year. Dividends have grown at the rate of 4.8% per year and are expected to continue to do so for the foreseeable future. What is the Crypton's cost of capital where the firm's tax rate is 30%?
round to 3 decimal pointd]s

Explanation / Answer

Let rate of return on bonds be i1.

P = C * ( 1 - (1+i1)^-N)/i1 + M * (1 + i1)^-N

P = $ 971

M = $ 1000

C = 0.063 * 1000 = 63

N = 15

971 = 63 * ( 1 - ( 1+i10^-15)/i1 + 1000 * ( 1 + i1)^-15

solving the above equation we get,

i1 = 6.61 % [ use online solver to solve the above equation. it cannot be solved directly]

let rate of return on stock be i2,

i2 = D1/P0 + g

P0 = 30.73

D1 = 2.27

g = 0.048

i2 = 2.27/30.73 + 0.048 = 12.19 %

if we know the risk free rate, Rf and beta () of the company then,

WACC = 0.36 * cost of equity + 0.64 * cost of debt

cost of equity = Rf + * i2 = Rf + *0.1219

Cost of debt = (Rf + i1)* (1 -T) = (Rf + 0.0661) * ( 1 - 0.3)

WACC = 0.36*(Rf + *0.1219) + 0.64 *  (Rf + 0.0661) * ( 1 - 0.3)

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