Mullineaux Corporation has a target capital structure of 60 percent common stock

Question

Mullineaux Corporation has a target capital structure of 60 percent common stock, 15 percent preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 35 percent.

What is Mullineaux’s WACC? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the aftertax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16))

What is Mullineaux’s WACC? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

weights costs producct

common stock 0.60 0.10 0.06

preferred stock 0.15 0.04 0.006

debt 0.25 0.039 0.00975

WACC= 0.07575 or 7.58%

pretax cost of debt =6% or 0.06 tax= 35%

after tax cost of debt = cost debt (1-tax) 0.06(1-0.35)

0.06 * 0.65= 0.039 or 3.90%

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