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, 15 percent preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 4 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 35 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.)

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.)

Explanation / Answer

The WACC formula states that:

WACC = kd * wd * (1 - t) + kp * wp + ke * we

Where:

kd = cost of debt
wd = % debt
t = tax rate
kp = cost of preferred stock
wp = % preferred stock
ke = cost of common equity
we = % common equity

So your formula is:

WACC = 25% * 6% * (1-35%) + 15% * 4% + 60% * 1%

WACC = 7.575%

After tax cost of debt = 6%*(1-35%)

                              =3.9%

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