Mullineaux Corporation has a target capital structure of 64 percent common stock

Question

Mullineaux Corporation has a target capital structure of 64 percent common stock, 9 percent preferred stock, and 27 percent debt. Its cost of equity is 13.4 percent, the cost of preferred stock is 6.4 percent, and the cost of debt is 8.1 percent. The relevant tax rate is 40 percent. 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).) What is the after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16)).

Explanation / Answer

a)

WACC={ We x Ke }+ {Wp x Kp }+ {Wd x Kd(1-t)}

We= Weight of Equity=64%

Ke=Cost of Equity=13.4

Wp= Weight of Preferred Stock=9%

Kp= Cost of Preferred Stock=6.4

Wd= Weight of Debt=27%

Kd= Cost of Debt=8.1

T= 40% or 0.40

WACC= {64 x 13.4} +{9 x 6.4} +{27 x 8.1(1-0.40)}

              =8.576+0.576+1.3122

             =10.46%

b) After cost of Debt

                = Wd x Kd(1-t)

                =27% x 8.1(1-0.40)

                =27% x 4.86

                =1.3122%

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