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, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 9 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 34 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, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 9 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 34 percent.

Explanation / Answer

a)

WACC = Kd*Wd*(1-t) + Ke* We + Kp * Wp

Wd = 0.45, We = 0.5 and Wp = 0.05

Kd = 6%, Ke = 9%, Kp = 4%

WACC= 6%* 0.45*(0.66) + 9% * 0.50 + 4% * 0.05 = 6.48%

b)

Post tax cost of debt = Kd * (1-t) = 6%*0.66 = 3.96%

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