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, 5.6% bonds that mature in 15 years and play annual interest will sell for $971. Common stock of the firm is currently selling for $29.88 per share and the firm expects to pay a $2.31 dividend next year. Dividends 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%?<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Crypton’s cost of capital is %? (Round to Three decimal places)

Explanation / Answer

Small correction

yield on bonds is

yield on bonds is y

971  * ( 1 + y )^15 = 1000 * ( 1.056 )^15

y = 0.05897

i.e 5.897%

let the cost of equity be x

29.88 = 2.31/ ( x - 0.052 )

x =ÂÂ

12.9309%

Hence cost of capital is

0.35 * 12.9309 + 0.65 * 5.897 * ( 1 - 0.3 ) =Â 7.209%

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