Crypton Electronics has a capital structure of consisting of 40% common stock an

Question

Crypton Electronics has a capital structure of consisting of 40% common stock and 60% debt. A debt issue of $1,000 par value, 6.5% bonds that mature in 15 years and pay annual interest will sell for $976. Common stock of the firm is currently selling for $30.79 per share and the firm expects to pay a $2.29 dividend next year. Dividends have grown at the rate of 5.4% per year and are expected to continue to do so for the foreseeable future. What is Cryptons cost of the capital where the firm's tax rate is 30%?

Explanation / Answer

Cost of debt = rd 976 = 65/(1+rd) + 65/(1+rd)^2 + 65/(1+rd)^3...........1065/(1+rd)^15 rd= 6.76% cost of equity = re 30.79 = 2.29/(re-5.4%) re= 12.84% Cryptons cost of the capital = 12.84%*40% + 60%*6.76%*(1-30%) =8% (approximately)

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