Mullineaux Corporation has a target capital structure of 65 percent common stock

Question

Mullineaux Corporation has a target capital structure of 65 percent common stock, 5 percent preferred stock, and 30 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 38 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 %

Explanation / Answer

After tax cost of debt=7(1-0.38)=4.34%

WACC=Respective costs*Respective investment weights

=(0.65*0.11)+(0.05*0.05)+(0.3*0.0434)

=8.70%(Approx).

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