Mullineaux Corporation has a target capital structure of 75 percent common stock
ID: 2764893 • 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 4 percent, and the pretax cost of debt is 5 percent. The relevant tax rate is 30 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 4 percent, and the pretax cost of debt is 5 percent. The relevant tax rate is 30 percent.
Explanation / Answer
Answer:
In order to calculate WACC, the cost of debt is taken after. Hence we will calculate first Part b of the question:
b) After tax cost of debt = Before Tax Cost of Debt x (1 - Tax Rate) = 5% (1 - 0.30) = 3.5%
a) Calculation of WACC
WACC = (Cost of Equity x Weight of Equity in Capital Structure) + (Cost of Preferred Stock x Weight of Preferred Stock in Capital Structure) + (Cost of Debt after tax x Weight of Debt in Capital Structure)
WACC = (8% x 0.75) + (4% x 0.15) + (3.5% x 0.1) = 6% + 0.6% + 0.35% = 6.95%
WACC = 6.95%
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