crypton electronics has a capital structure consisting of 37% common stock and 6
ID: 2698717 • Letter: C
Question
crypton electronics has a capital structure consisting of 37% common stock and 63% debt. a debt issue of 1000 par value, 6.3% bonds that mature in 15 years and pay annual interes will sell for $971. common stock of the firm is currently selling for $29.15 per share and the firm expects to pay a $2.26 dividend next year. dividends have grown at the rate of 5.2% per year and are expected to continue to do so for the foreseeable future. what is cryptons cost of capital where the firms tax rate is 30%? cryptons cost of capital is __% (round to three dicimal places).
Explanation / Answer
The Current price of Common Stock is 29.15
According to Dividend Growth Model P0=D/ke-g
Therefore, 29.15 = 2.26/ ke-5.2%
29.15 (ke-5.2%) = 2.26
ke = 12.95%
Cost of Debt is 6.3%
Cost of Debt after Tax is 6.3%-30% = 4.41
Therefore Cost of Capital = Weightage of Common Stock * Cost of Common Stock + Weightage of Debt * Cost of Debt
= 0.63*4.41% + 0.37 *12.95
= 7.5698%
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