Calculating the cost of capital of kingston toys

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Point 1: You are given the task of calculating the cost of capital of Kingston Toys. The company faces a tax rate of 40%. The company has 100,000 common shares. You estimate that the beta of the common stock is 1.5. The equity market risk premium is estimated to be 5%, and the risk-free rate is 5%. The company has just paid a dividend of $2 per share. You expect that the dividends will grow at a rate of 15% until Year 4. After Year 4, the dividends are expected to grow at a constant rate of 5%. You decide to employ the CAPM approach to calculate the cost of equity. The company has two different debt issues that are outstanding.

Point 2: The first issue consists of 1,000 semi-annual coupon bonds. Each bond has a face value of $1000. The annual coupon rate is 10%, and the bonds are currently trading at a YTM that equals 12%. The bonds will mature 10 years from now. The second issue consists of 1000 zero coupon bonds. Each bond has a face value of $1000, and will mature 15 years from now and is trading at 50% of its face value.

Question 1: Using the information provided above, calculate the weighted average cost of capital of Kingston Toys

Reference no: EM132493342

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