Mullineaux Corporation has a target capital structure of 60 percent common stock
ID: 2719543 • Letter: M
Question
Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 13.5 percent, the cost of preferred stock is 6.5 percent, and the cost of debt is 8.2 percent. The relevant tax rate is 35 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).)Explanation / Answer
After tax cost of debt = Cost of debt ( 1- Tax Rate )
= 8.2( 1- 0.35) i.e 5.33%
WACC = Weight of equity * Cost of equity + Weight of debt * Cost of debt + Weight of preferred stock * Cost of preferred stock
= ( 0.60*13.5) + ( 0.05*6.5) + ( 0.35*5.33)
= 8.10+0.325+1.8655 i.e 10.2905%
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