Mullineaux Corporation has a target capital structure of 50 percent common stock

Question

Mullineaux Corporation has a target capital structure of 50 percent common stock, 10 percent preferred stock, and 40 percent debt. Its cost of equity is 8 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 5 percent. The relevant tax rate is 38 percent.

a. 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.)

WACC % =

b. 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.)

Aftertax cost of debt % =

Explanation / Answer

a. 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.) WACC % = Sum total of all costs of equity + debt For each part, we need to multiply the costs by the probability of the investment viz. Cost of equity 8% multiplied by 0.5 (50% common stock out of 100%) etc. Cost of Equity 0.04 Cost of Preferred Stock 0.004 Cost of Debt 0.02 WACC (Total Cost) 0.064 6.40 % b. 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.) Aftertax cost of debt % = Cost of Debt - Tax impact = 3.10%

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