Crypton Electronics has a capital strucure consisting of 42% common stock and 58

Question

Crypton Electronics has a capital strucure consisting of 42% common stock and 58% debt. A debt issue of $1,000 par value, 5.5% bonds that mature in 15 years and pay annual interest will sell for $980. Common stock of the firm is currently selling for $30.08 per share and the firm expects to pay a $2.21 dividend next year. Dividends have grown at the rate of 5.1% 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%?

Explanation / Answer

rate equity, use Gordon growth model: P0 = D1/ (r -g)..
30.06 = 2.31 / (r - 0.051) and solve for r

rate debt: calc the IRR for the bond
CF0 = (974)
assuming semi-annual bond pmts: coupon = 1,000* (0.057/2) = 28.50
CFs 1 - 29: 28.50
CF 30: 1,028.50
if you use a financial calculator you need to multiply the IRR times two to reflect the semi-annual nature of the bond. Then multiply that rate by (1 - tx rate in decimal form) <after tax rate of debt

WACC = weight equity * rate equity + weight debt * after tax rate debt

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