Mullineaux Corporation has a target capital structure of 65 percent common stock
ID: 2750386 • Letter: M
Question
Mullineaux Corporation has a target capital structure of 65 percent common stock, 5 percent preferred stock, and 30 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 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
Solution:
a.
b.
Aftertax Cost of Debt = 7 % * ( 1 - 38 % ) = 4.34 %
Weighted Average Cost of Capital -WACC Capital Weights Cost of Capital Weights * Cost of Capital Debt 30% 7% *( 1 - 38%) = 4.34% 1.30% Preferred Stock 5% 5.00% 0.25% Common Equity 65% 11% 7.15% WACCC 8.70%Related Questions
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