12. Baker\'s Footwear has 8,000 shares of common stock outstanding at a price pe

Question

12.

Baker's Footwear has 8,000 shares of common stock outstanding at a price per share of $64 and a rate of return of 15 percent. The firm has 2,000 shares of 6 percent preferred stock outstanding at a price of $54 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $100,000 and a market price equal to 102 percent of face value. The yield-to-maturity on the debt is 9.36 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent?

Explanation / Answer

First determine the annual cost, or dividends expected, and Market Value of each class.

Common - 8,000 shs at $64, or $512,000 MV, paying 15% or $76,800.

Preferred - 2,000 shs at $54, or $108,000 MV, paying $6, or $12,000. A return of 11% on MV.

Debt - $102,000 MV, paying 9.36% less 35% tax, or 6.08% net. Annual cost = $6,202.

Now add up the total annual payout - 76,800+ 12,000+ 6,202 = 95,002. divided by total Market Value of $722,000 = 13.16% WACC

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