Mullineaux Corporation has a target capital structure of 75 percent common stock

Question

Mullineaux Corporation has a target capital structure of 75 percent common stock, 5 percent preferred stock, and 20 percent debt. Its cost of equity is 11.25 percent, the cost of preferred stock is 5.5 percent, and the cost of debt is 6.1 percent. The relevant tax rate is 35 percent. Required: (a) What is Mullineauxs WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) WACC I (b) What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Aftertax cost of debt % check my work

Explanation / Answer

The WACC formula states that:

WACC = kd * wd * (1 - t) + kp * wp + ke * we

Where:

kd = cost of debt
wd = % debt
t = tax rate
kp = cost of preferred stock
wp = % preferred stock
ke = cost of common equity
we = % common equity

So your formula is:

WACC = 20% * 6.1% * (1 - 0.35) + 5% * 5.50% + 75% * 11.25% = 9.51%

After tax cost of debt = 6.1% * (1 - 0.35) = 3.97%

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