Question

 Crypton Electronics has a capital structure consisting of 40 percent common stock and 60 percent debt. A debt issue of ​$1 comma 000 par​ value, 6.0 percent bonds that mature in 15 years and pay annual interest will sell for ​$975. Common stock of the firm is currently selling for ​$30.00 per share and the firm expects to pay a ​$2.25 dividend next year. Dividends have grown at the rate of 5.0 percent 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 ​percent?

Answer 1

Calculating Cost of Debt,

Calculating YTM of Bond,

Using TVM Calculation,

I = [PV = 975, FV = 1000, T = 15, PMT = 60]

I = 6.26%

So,

Cost of Debt = 6.26%

Calculating Cost of Equity,

As Per Constant Dividend Growth Model,

Stock Price = D₁/(r - g)

So,

r = (2.25/30) + 0.05

r = 12.50%

So,

Cost of Equity = 12.50%

And,

WACC = w_d(1 - t)c_d + w_ec_e

WACC = 0.60(1 - 0.30)(0.0626) + 0.40(0.125)

WACC = 0.026292 + 0.05

WACC = 7.63%

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