Problem 14-9 Calculating WACC [LO3] Mullineaux Corporation has a target capital
ID: 2753876 • Letter: P
Question
Problem 14-9 Calculating WACC [LO3]
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
Weight of Equity, We= 0.75; Weight of Preferred Stock, Wp=0.15; Weight of Debt,Wd=0.1;
Cost of equity, Ke = 8%; Cost of preferred stock, Kp= 4%, and the Pretax cost of debt= 5%; Tax rate,T= 30%
So WACC= WeKe + WpKp + WdKd(1-T)= 0.75*8%+0.15*4%+0.1*5%(1-0.3)= 6.95%
After Tax Cost of Debt= Kd(1-T)= 3.5%