Crypton electronic has a structure consisting of 46% common stock and 54% debt.

Question

Crypton electronic has a structure consisting of 46% common stock and 54% debt. A debt issue of $1000 par value, 6.3% bonds that mature in 15 years and pay annual interest will sell for $982. Common stock of the firm is currently selling for $30.65 per share and the firm expects to pay a $2.32 dividend next year. Dividends have grown at the rate of 5.2% per year and are expected to continue to do so for the for the foreseeable future. What is Cryton's cost of capital where the firms tax rate is 30%?

Explanation / Answer

The common stock just paid a D1=$2.32 and has a growth rate of g=5.2%. Mkt price P0=$30.65 So COst of equity Ks = D1/P0 + g = 2.32/30.65 +5.2% =12.77% ...... (a) Bond : Current Price PV=982, Par Value =FV=1000, Term = nper = 15 Coupon = 6.3%. So PMT = 6.3%*1000 = 63 So YTM = Rate(nper,pmt,pv,fv) = Rate(15,63,-982,1000) = 6.49% = Kd ...(b) WACC (Ka)= Wd*(Kd)*(1-t)+(Wp)*(Kp) +(We)*(Ke) where Wd= The proportion of the financing taken on by debt=54% We= The proportion of the financing provided by equity=46% Kd=6.49% Ke = 12.77% T=30% And WACC (Ka) = Wd*(Kd)*(1-t)+ (We)*(Ke) ie wacc = 54%*6.49%*(1-30%) + 46%*12.77% =8.33%

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