Crypton Electronics has a capital structure consisting of 37% common stock and 6

Question

Crypton Electronics has a capital structure consisting of 37% common stock and 63% debt. A debt issue of $1,000 par value, 6.1% bonds that mature in 15 years and pay annual interest will sell for $979. Common stock of the firm is currently selling for $29.65 per share and the firm expects to pay a $2.27 dividend next year. Dividends have grown at the rate of 5.1% per year and are expected to continue to do so for the foreseeable future. What is Crypton's cost of capital where the firm's tax rate is 30%? (ROUND TO THREE DECIMAL PLACES) Crypton's cost of capital is ___%

Explanation / Answer

Pre-tax Cost of debt is the YTM (IRR) of the bond...

979= 61PVIFA(YTM,15)+1000PVIF(YTM,15)

YTM= 6.32%
After-tax cost of debt = pretax cost * ( 1 - tax rate) = 6.32(1-.3)= 4.424%

Cost of equity..."k(e)"
using Gordon growth model...solve for k
Price = D1/(k - g),
29.65 = 2.27/(k - 0.051)
k = 12.756%

WACC = (weight debt * (rate debt * (1 - tax))) + (weight equity * rate equity)
WACC =( .63x4.424)+(.37x12.756)
WACC = 7.51%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.