Crypton Electronics has a capital structure consisting of 35% common stock and 6

Question

Crypton Electronics has a capital structure consisting of 35% common stock and 65% debt. A debt issue of $1,000 par value, 6.1% bonds that mature in 15 years and pay annual interest will sell for $978. Common stock of the firm is currently selling for $29.44 per share and the firm expects to pay a $2.17 dividend next year. Dividends have grown at the rate of 5.1% per year and are expected to continue to do so for the forseeable future. What is Crypton's cost of capital where the firm's tax rate is 30%. Crypton"s cost of capital is

Explanation / Answer

The bond gives 6.33%,

the common stock gives 7.37% + 5.1% = 12.47%

as tax rate is 30% cost of capital is 6.33 * ( 100 - 30 )/100 * 0.65 + 0.35 * 12.47 = 7.24%

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