Question

​(Weighted average cost of​ capital)  Crypton Electronics has a capital structure consisting of

3939

percent common stock and

6161

percent debt. A debt issue of

​$1 comma 0001,000

par​ value,

6.36.3

percent bonds that mature in

1515

years and pay annual interest will sell for

​$974974.

Common stock of the firm is currently selling for

​$29.8429.84

per share and the firm expects to pay a

​$2.252.25

dividend next year. Dividends have grown at the rate of

4.94.9

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

3030

​percent?

a. The​ after-tax cost of debt is

​(Round to two decimal​ places.)

b.  The cost of common equity is

​(Round to two decimal​ places.)

c. ​ Crypton's cost of capital is

​(Round to three decimal​ places.)

Answer 1

(a)-After-tax Cost of Debt

The After-tax Cost of Debt is the after-tax Yield to maturity of the Bond

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Face Value [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6.30%]	PMT	63
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [15 Years]	N	15
Bond Price [-$974]	PV	-974

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 6.58%

After Tax Cost of Debt = Yield to maturity x (1 – Tax Rate)

= 6.58% x (1 – 0.30)

= 6.58% x 0.70

= 4.61%

(b)-Cost of Common Equity

Dividend in year 1 (D1) = $2.25 per share

Current selling price per share (P0) = $29.84 per share

Dividend growth Rate (g) = 4.90% per year

Therefore, the Cost of Common Equity = [D1 / P0] + g

= [$2.25 / $29.84] + 0.0490

= 0.0754 + 0.0490

= 0.1244 or

= 12.44%

(c)- Crypton's Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

= [4.61% x 0.61] + [12.44% x 0.31]

= 2.812% + 4.852%

= 7.664%

“Hence, the Crypton's Weighted Average Cost of Capital (WACC) will be 7.664%”