Crypton Electronics has a capital strucure consisting of 44% common stock and 56

Question

Crypton Electronics has a capital strucure consisting of 44% common stock and 56% debt. A debt issue of $1,000 par value, 5.5% bonds that mature in 15 years and pay annual interest will sell for $970. Common stock of the firm is currently selling for $30.99 per share and the firm expects to pay a $2.24 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 Crypton's cost of capital where the firm's tax rate is 30%?

Explanation / Answer

Hi,

Please find the answer as follows:

Cost of Debt = Rate(nper,pmt,pv,fv)

Nper = 15

PMT = 1000*.5.5% = 55

PV = -970

FV = 1000

Cost of Debt = Rate(15,55,-970,1000) = 5.80%

After Tax Cost of Debt = 5.80*(1-.30) = 4.06%

Cost of Equity = D1/Current Stock Price + g = 2.24/30.99 + .052 = 12.43%

Weighted Average Cost of Capital = Weight of Debt*After Tax Cost of Debt + Weight of Equity*Cost of Equity

WACC = .56*4.06 + .44*12.43 = 7.74%

Answer is 7.74%

Thanks.

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