Crypton Electronics has a capital structure consisting of 38% common stock and 6

Question

Crypton Electronics has a capital structure consisting of 38% common stock and 62% debt. A debt issue of 1,000 par value, 5.6% bonds that mature in 15 years and pay annual interest will sell for $974. Common stock of the firms is currently selling for $30.04 per share and the firm expects to pay a $2.24 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 firms tax rate is 30%. (round to the nearest three decimals).

Explanation / Answer

Po =D1/(r-g)

30.04 = 2.24/(r-0.046)

cost of equity Re = 12.06%

in finding cost of debt

974 = 56* PVIFA(r%,15) + 1000 * PVIF(r%,15)

YTM =5.865%

after tax cost of debt = (1-0.3) * 5.865% = 4.11%

WACC = 0.38 * 0.1206 + 0.62 * 0.0411 =7.13%

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