Mullineaux Corporation has a target capital structure of 75 percent common stock
ID: 2753797 • Letter: M
Question
Mullineaux Corporation has a target capital structure of 75 percent common stock, 15 percent preferred stock, and 10 percent debt. Its cost of equity is 8 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 35 percent.
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.)
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.)
Mullineaux Corporation has a target capital structure of 75 percent common stock, 15 percent preferred stock, and 10 percent debt. Its cost of equity is 8 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 35 percent.
Explanation / Answer
a. Weighted average cost of capital (WACC) = weight * cost of equity + weight*preference stock costs + weight*cost of debt*(1-tax)
= 75%*8%+15%*5%+10%*7%(1-35%)
=6%+0.75%+0.455%
= 7.2050%
b.
after tax cost of debt = cost of debt*(1-tax) = 7%(1-35%) = 4.55%
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