Crypton Electronics has a capital structure consisting of 40 percentage common s
ID: 2730618 • Letter: C
Question
Crypton Electronics has a capital structure consisting of 40 percentage common stock and 60 percentage debt. A debt issue of dollar 1,000 par value, 6 percentage bonds that mature in 15 years and pay annual interest will sell for dollar 975. Common stock of the firm is currently selling for dollar 30 per share and the firm expects to pay a dollar 2.25 dividend next year. Dividends have grown at the rate of 5 percentage 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 percentage?Explanation / Answer
AFTER TAX COST OF DEBT
= COUPON INTEREST * (1 - TAX RATE)
= 6% * (1 - 0.30)
= 6% * 0.70
= 4.2%
COST OF COMMON STOCK
= (DIVIDEND NEXT / CURRENT PRICE) + GROWTH
= ($2.25 / $30) + 0.05
= 0.075 + 0.05
= 0.125 OR 12.5%
COST OF CAPITAL WACC
= WEIGHT * COST OF DEBT + WEIGHT * COST OF COMMON STOCK
= 0.60 * 4.2% + 0.4 * 12.5%
= 2.52% + 5%
= 7.52%
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