Question

Falcons Footwear has 12 million shares of common stock selling for $60/share with a required return of 9.2 percent. They have 2 million shares of preferred stock selling for $85/share with a required return of 8.82 percent. Finally, Falcons Footwear has $100 million in bonds with a return of 7 percent. The firm’s marginal tax rate is 40%.

Required:

Compute the weighted average cost of capital (WACC) for Falcons Footwear.

Answer 1

We know that the formuala for weighted average cost of capital is.

Wa*Ke + Wb * kp + Wc * Kd

Wa = Weight of equity and Ke = Cost of equity

Wb = Weight of preferance shares and Kp = Cost of preference capital

Wd = Weight of debt and Kd = Cost of debt( Need to be considered post tax)

Total Capital = 12*60 + 2*85 + 100 = 990

Hence WACC = 0.727273*0.092 + 0.171717*0.0882 + 0.10101 * (0.07)*60%

= 0.086297 * 100

= 8.62969 %

Note - For debt always consider post tax required rate of return