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, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 9 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 34 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.)

Explanation / Answer

Source Proportion Cost After tax cost= Cost*(1-tax) Proportion*After tax cost Common Stock 50% 9.00 NA                                             4.50 Preferred Stock 5% 4.00 2.64                                             0.13 Debt 45% 6.00 3.96                                             1.78 WACC                                             6.41 The after tax cost of debt = 6*(1-0.34)= 3.96%

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