1) Mullineaux Corporation has a target capital structure of 65 percent common st

Question

1) 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.

a.

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.)

  WACC

%  

   

b.

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.)

  Aftertax cost of debt

%  

   

2) Consider the following information:

State of Economy

Probability of

State of Economy

Portfolio Return

If State Occurs

  Recession

.15

.22

  Normal

.51

.17

  Boom

.34

.31

  

Calculate the expected return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  Expected return

%

1) 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

State of Economy

State of Economy

Mullineaux Corporation Details % Weight Cost Tax Rate Post Tax cost Weighted Cost Common Stock 65.00% 11.00% 34.00% 11.00% 7.15% Preferred Stock 10.00% 6.00% 34.00% 6.00% 0.60% Debt 25.00% 8.00% 34.00% 5.28% 1.32% Total 9.07% a Company's WACC is   9.07% b Afetr Tax cost of debt= 5.28%

State of Economy

Probability of Portfolio Return Expected   Return State of Economy If State Occurs    Recession                              0.15                           0.220                    0.033    Normal                              0.51                           0.170                    0.087    Boom                              0.34                           0.310                    0.105 22.51% Therefore the expcetd return of the portfolio is = 22.51%

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