Homework SourseCrypton Electronics has a capital structure consisting of 35
Crypton Electronics has a capital structure consisting of 35% common stock and 65% debt. A debt issue of $1,000 par value, 6.1% bonds that mature in 15 years and pay annual interest will sell for $978. Common stock of the firm is currently selling for $29.44 per share and the firm expects to pay a $2.17 dividend next year. Dividends have grown at the rate of 5.1% 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
Solution
The bond gives 6.33%,
the common stock gives 7.37% + 5.1% = 12.47%
as tax rate is 30% cost of capital is 6.33 * ( 100 - 30 )/100 * 0.65 + 0.35 * 12.47 = 7.24%
