Shy Shoes Ltd.

Shy Shoes Ltd. has a bond outstanding with 7 yrs of maturity, coupon 5.55%, Face value of $1,000, market price of $920. It also has 6.2% Preferred Stock outstanding, which trades at $95.21. Its BETA is estimated as 1.35. Long-Term (10 yrs) US Treasury bonds yield 4.42%. Please, assume an equity risk premium of 6%, and a marginal corporate tax rate of 35%. Assume a target debt ratio of 50%. What is the cost of capital for Shy Shoes Ltd?

1. For the Shy Shoes problem (WACC), please assume the following weights for capital sources:

Debt 50% as in original problem, preferred stoxk: 10% (new), common equity remaining capital.

2. For same exercise, please assume a face value of preferred stock of $100 (as it is usually the case).