Crypton electronic has a structure consisting of 37% common stock and 63% debt.

Question

Crypton electronic has a structure consisting of 37% common stock and 63% debt. A debt issue of $1000 par value, 6.2% bonds that mature in 15 years and pay annual interest will sell for $979. Common stock of the firm is currently selling for $29.87 per share and the firm expects to pay a $2.34 dividend next year. Dividends have grown at the rate of 4.9% per year and are expected to continue to do so for the for the foreseeable future. What is Crypton's cost of capital where the firms tax rate is 30%?

Explanation / Answer

Equity:

Gordon model Po=D1/(Ks-g)

We have cost of Equity Ks = D1/P0 +g

= 2.34/29.87 + 4.9%

= 12.73%

DEbt : Face value = FV=1000,

Current price = PV= 979

nper = 15, PMT = 6.2%*1000 = 62

SO Rate Kd = Rate(nper,pmt,pv,fv)

= Rate(15,62,-979,1000)

so Kd =6.42%

We have

WACC (Ka)= Wd*(Kd)*(1-t) + (We)*(Ke)

where Wd= The proportion of the financing taken on by debt

We= The proportion of the financing provided by equity

T=30%

And WACC (Ka) = Wd*(Kd)*(1-t)+ (We)*(Ke)

ie wacc = 63%*6.42%*(1-30%) + 37%*12.73%

= 7.54%

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