Mullineaux Corporation has a target capital structure of 60 percent common stock

Question

Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 7 percent and the cost of debt is 8.7 percent. The relevant tax rate is 35 percent. Required: (a) What is Mullineaux?s WACC? (Do not round intermediate calculations. Enter your answer as a percentage 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 percentage rounded to 2 decimal places (e.g., 32.16).) Aftertax cost of debt %

Explanation / Answer

Hi,

Please find the correct answer as folows:

a) WACC = 60%*14%+5%*7%+35%*8.7%*(1-35%)

=10.73%

b) After tax cost of debt = 8.7%*(1-35%)

=5.66%

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