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 $1000 par value, 5.6% bonds that mature in 15 years and pay annual interest will sell for $975. Common stock of the firm is currently selling for $29.35 per share and the firm expects to pay a $2.25 dividend next year. Dividends have grown at the rate of 4.8% 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 rate is 30%?

Explanation / Answer

Bond yield is calculated in Excel as =RATE(15,-56,975,-1000,0). This is equal to 5.85%.

After tax cost of debt = yield * (1-tax rate) = 5.85%*(1-30%) = 4.1%

Cost of equity = next year dividend / stock price + growth rate = 2.25/29.35 + 4.8% = 12.47%

Cost of capital = 0.43*12.47% + 0.57*4.1% = 7.70%

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