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 10 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 30 percent.

What is Mullineaux

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 10 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 30 percent.

Explanation / Answer

Answer:

Cost of debt = Pretax Cost * (1- tax rate )

= 7% * (1-0.30) = 4.9%

WACC = (Cost of Equity * weight of equity) + (Cost of Pref. * weight of Pref.) + (Cost of Debt * weight of Debt)

= (10% *60%) + (5%*5%) + (4.9%*35%)

= 7.97 %

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