Mullineaux Corporation has a target capital structure of 65 percent common stock
ID: 2718493 • Letter: M
Question
Mullineaux Corporation has a target capital structure of 65 percent common stock, 10 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 6 percent, and the pretax cost of debt is 8 percent. The relevant tax rate is 34 percent.
What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent 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 percent rounded to 2 decimal places, e.g., 32.16.)
Mullineaux Corporation has a target capital structure of 65 percent common stock, 10 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 6 percent, and the pretax cost of debt is 8 percent. The relevant tax rate is 34 percent.
Explanation / Answer
a)
WACC = Weight of Common Stock* Cost of Common Stock + Weight of Preferred Stock* Cost of Preferred Stock + Weight of Debt* After Tax cost of Debt
WACC = 65% * 11 + 10% * 6 + 25%*8*(1-34%)
WACC = 9.07%
b)
After Tax cost of Debt = pretax cost of debt*(1-tax rate)
After Tax cost of Debt = 8*(1-34%)
After Tax cost of Debt = 5.28%
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