Cryton Electronics has a capital structure consisting of 37% common stock and 63

Question

Cryton Electronics has a capital structure consisting of 37% common stock and 63% debt. A debt issue of $1,000 par value,62% bonds that mature in 15 years and pay annua; interest will sell for $975. Common stock of the firm is currently selling for $29.48 per share and the firm expects to pay a $2.22 dividend next year. Dividends have grown at the rate of 4.6% 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%?

Explanation / Answer

Let rate of return on bonds be i1. P = C * ( 1 - (1+i1)^-N)/i1 + M * (1 + i1)^-N P = $ 975 M = $ 1000 C = 0.063 * 1000 = 63 N = 15................... 975 = 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 = 29.48 D1 = 2.27 g = 0.046 CALCULATE............ I2........... if we know the risk free rate, Rf and beta (?) of the company then, WACC = 0.37 * cost of equity + 0.63 * cost of debt........ cost of equity = Rf + ? * i2 =...... Cost of debt = (Rf + i1)* (1 -T) = ? CALCUALTE........... FIND.............WACC

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