Mullineaux Corporation has a target capital structure of 60 percent common stock

Question

Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 13 percent, the cost of preferred stock is 6 percent, and the cost of debt is 7.7 percent. The relevant tax rate is 35 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 aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 13 percent, the cost of preferred stock is 6 percent, and the cost of debt is 7.7 percent. The relevant tax rate is 35 percent.

Explanation / Answer

After tax cost of debt = Cost of debt ( 1- Tax rate)

= 7.7%( 1-0.35) i.e 5.005

Weighted average cost of capital = Weight of debt * Cost of debt + Weight of equity * Cost of equity + Weight of preferred stock * Cost of preferred stock

= 0.35*5.005+0.05*6+0.60*13

= 9.85%

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