Mullineaux Corporation has a target capital structure of 62 percent common stock

Question

Mullineaux Corporation has a target capital structure of 62 percent common stock, 7 percent preferred stock, and 31 percent debt. Its cost of equity is 14.2 percent, the cost of preferred stock is 7.2 percent, and the cost of debt is 8.9 percent. The relevant tax rate is 30 percent. What is Mullineaux%u2019s WACC? What is the aftertax cost of debt?

Mullineaux Corporation has a target capital structure of 62 percent common stock, 7 percent preferred stock, and 31 percent debt. Its cost of equity is 14.2 percent, the cost of preferred stock is 7.2 percent, and the cost of debt is 8.9 percent. The relevant tax rate is 30 percent. What is Mullineaux%u2019s WACC? What is the aftertax cost of debt?

Explanation / Answer

The WACC formula states that:

WACC = kd * wd * (1 - t) + kp * wp + ke * we

Where:

kd = cost of debt=8.9%

wd = % debt =31%

t = tax rate=30%

kp = cost of preferred stock =7.2%

wp = % preferred stock =7%

ke = cost of common equity =14.2%

we = % common equity=62%

So WACC = 8.9%*31%*(1-30%) + 7.2%*7% + 14.2%*62% = 11.24%

And ATax cost of debt = 8.9%*(1-30%)=6.23%

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