Mullineaux Corporation has a target capital structure of 61 percent common stock

Question

Mullineaux Corporation has a target capital structure of 61 percent common stock, 6 percent preferred stock, and 33 percent debt. Its cost of equity is 13.6 percent, the cost of preferred stock is 6.6 percent, and the cost of debt is 8.3 percent. The relevant tax rate is 34 percent.

What is Mullineaux’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

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).)

Mullineaux Corporation has a target capital structure of 61 percent common stock, 6 percent preferred stock, and 33 percent debt. Its cost of equity is 13.6 percent, the cost of preferred stock is 6.6 percent, and the cost of debt is 8.3 percent. The relevant tax rate is 34 percent.

Explanation / Answer

WACC   = 10.50%

After tax cost of debt = 5.48%

Weight of common stock = 61%

Weight of Preferred stock = 6%

Weight of Debt = 33%

Cost of Equity = 13.60%

Cost of Preferred stock = 6.6%

Cost of Debt = 8.3%

Tax rate = 34%

Weighted Average Cost of Capital (WACC) = Weight of equity * cost of equity + weight of preferred stock * cost of preferred stock + weight of debt * cost of debt * (1-tax rate)

WACC = 0.61 * 0.136 + 0.06*0.066 + 0.33 * 0.083 * (1-0.34)

             = 0.08296 + 0.00396 + 0.0180774

             = 0.1049974   or 10.50% (rounded off)

After tax cost of debt = 0.083 * (1-0.34) = 0.05478 or 5.48% (rounded off)

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