Mullineaux Corporation has a target capital structure of 50 percent common stock

Question

Mullineaux Corporation has a target capital structure of 50 percent common stock, 10 percent preferred stock, and 40 percent debt. Its cost of equity is 8 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 5 percent. The relevant tax rate is 38 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 50 percent common stock, 10 percent preferred stock, and 40 percent debt. Its cost of equity is 8 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 5 percent. The relevant tax rate is 38 percent.

Explanation / Answer

PARTICULARS   COST WEIGHT   WEIGHTED COST

COMMON STOCK 8% 0.5 4%

PREFERRED STOCK 4% 0.1 0.4%

DEBT 3.1% 0.4 1.24%

     TOTAL WEIGHTED COST 5.64%

AFTER TAX COST OF DEBT = PRETAX COST OF DEBT ( 1-TAX RATE)

= 5 * 62%

= 3.1%

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