Crypton Electronics has a capital structure consisting of 39% common stock and 6

Question

Crypton Electronics has a capital structure consisting of 39% common stock and 61% debt. A debt issue of $1,000 par value, 5.7% bonds that mature in 15 years and play annual interest will sell for $979. Common stock of the firm is currently selling for $30.35 per share and the firm expects to pay a $2.19 dividend next year. Dividends grown at the rate of 5.3% 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%?

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Explanation / Answer

yield on debt be y

979 * ( 1 + y )^15 = 1000 * ( 1.057 ) ^15

y = 5.84966%

Cost of equity is x

x= 5.3% + 2.19 * 100 / 30.35 = 12.51582%

Cost of capital is

( 1 - 0.3 ) * 5.84966 * 0.61 + 0.39 * 12.51582

= 7.379%

~7.38%

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