Mullineaux Corporation has a target capital structure of 64 percent common stock

Question

Mullineaux Corporation has a target capital structure of 64 percent common stock, 9 percent preferred stock, and 27 percent debt. Its cost of equity is 13.4 percent, the cost of preferred stock is 6.4 percent, and the cost of debt is 8.1 percent. The relevant tax rate is 40 percent.

What is Mullineaux

Mullineaux Corporation has a target capital structure of 64 percent common stock, 9 percent preferred stock, and 27 percent debt. Its cost of equity is 13.4 percent, the cost of preferred stock is 6.4 percent, and the cost of debt is 8.1 percent. The relevant tax rate is 40 percent.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

WACC = Cost of Debt*(1-Tax Rate)*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity

WACC = 8.1*(1-40%)*.27 + 6.4*.09* + 13.4*.64 = 10.46%

Part B:

After Tax Cost of Debt = Cost of Debt*(1-Tax Rate) = 8.1*(1-.40) = 4.86%

Thanks.

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