Mullineaux Corporation has a target capital structure of 75 percent common stock

Question

Mullineaux Corporation has a target capital structure of 75 percent common stock, 15 percent preferred stock, and 10 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 30 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 75 percent common stock, 15 percent preferred stock, and 10 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 30 percent.

Explanation / Answer

Answer:

In order to calculate WACC, the cost of debt is taken after. Hence we will calculate first Part b of the question:

b) After tax cost of debt = Before Tax Cost of Debt x (1 - Tax Rate) = 5% (1 - 0.30) = 3.5%

a) Calculation of WACC

WACC = (Cost of Equity x Weight of Equity in Capital Structure) + (Cost of Preferred Stock x Weight of Preferred Stock in Capital Structure) + (Cost of Debt after tax x Weight of Debt in Capital Structure)

WACC = (8% x 0.75) + (4% x 0.15) + (3.5% x 0.1) = 6% + 0.6% + 0.35% = 6.95%

WACC = 6.95%

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.