Crypton Electronics has a capital structure consisting of 44% common stock and 5

Question

Crypton Electronics has a capital structure consisting of 44% common stock and 56% debt. A debt issue of $1,000 par value, 5.5% bonds that mature in 15 years and pay annual interest will sell for $976. Common stock of the firm is currently selling for $30.41 per share and the firm expects to pay a $2.27 dividend next year. Dividends have grown at the rate of 5.4% per year and are expected to continue to do so for the forseeable future. What is Crypton's cost of capital where the firm's tax rate is 30%.

Crypton"s cost of capital is

Explanation / Answer

Cost of debt = rd

976 = 55/(1+rd) + 55/(1+rd)^2 + 55/(1+rd)^3 ......1055/(1+rd)^15

rd= 5.74%

cost of equity = re

30.41 = 2.27/(re-5.4%)

re= 12.86%

Crypton"s cost of capital = 44%*12.86% +56%*5.74%*(1-30%) = 7.91%

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