Crypton Electronics has a capital structure consisting of 43% common stock and 5

Question

Crypton Electronics has a capital structure consisting of 43% common stock and 57% debt. A debt issue of 1,000 par value, 6.2% bonds that mature in 15 years and pay annual interest will sell for $973. Common stock of the firms is currently selling for $29.71 per share and the firm expects to pay a $2.27 dividend next year. Dividends have grown at the rate of 4.9% per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firms tax rate is 30%. (round to the nearest three decimals).

Explanation / Answer

BOND:
973= 62PVIFA(r,15)+1000PVIF(r,15)
r= 6.49%
AFTER tax Rd= 6.49(1-.3)= 4.543%

Common stock
29.71= 2.27/(Ke-.049)

Ke= 12.54%

WACC= .43x12.54+(.57x4.543)= 7.982%

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