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crypton electronics has a capital structure consisting of 37% common stock and 6

ID: 2698717 • Letter: C

Question

crypton electronics has a capital structure consisting of 37% common stock and 63% debt. a debt issue of 1000 par value, 6.3% bonds that mature in 15 years and pay annual interes will sell for $971. common stock of the firm is currently selling for $29.15 per share and the firm expects to pay a $2.26 dividend next year. dividends have grown at the rate of 5.2% per year and are expected to continue to do so for the foreseeable future. what is cryptons cost of capital where the firms tax rate is 30%? cryptons cost of capital is __% (round to three dicimal places).

Explanation / Answer

The Current price of Common Stock is 29.15

According to Dividend Growth Model P0=D/ke-g

Therefore, 29.15 = 2.26/ ke-5.2%

            29.15 (ke-5.2%) = 2.26

                   ke = 12.95%

Cost of Debt is 6.3%

Cost of Debt after Tax is 6.3%-30% = 4.41

Therefore Cost of Capital = Weightage of Common Stock * Cost of Common Stock + Weightage of Debt * Cost of Debt

                                  = 0.63*4.41% + 0.37 *12.95

                                  = 7.5698%