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 12 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 5 percent. The relevant tax rate is 40 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 65 percent common stock, 5 percent preferred stock, and 30 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 5 percent. The relevant tax rate is 40 percent.

Explanation / Answer

aftertax cost of debt=5(1-0.4)=3%

WACC=Respective costs*Respective weights

=(0.65*12)+(0.05*4)+(0.3*3)=8.9%

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