Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the pre-tax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent?

Question

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DeniceSandidge DeniceSandidge · Answer 1 · 2020-03-28T04:29:22+01:00

Answer:

WACC = 9.18%

Explanation:

given data

common stock = 46 percent

preferred stock = 5 percent

cost of equity = 15.8 percent

cost of preferred stock = 8.3 percent

pre-tax cost of debt = 6.8 percent

tax rate = 23 percent

solution

first we get here after tax cost of debt that is express as

after tax cost of debt = pretax cost of debt × (1 - relevant tax rate) ...........1

put here value and we get

after tax cost of debt = 6.8% × (1 - 0.23)

after tax cost of debt = 0.05236

after tax cost of debt = 5.24 %

and

now for WACC

WACC = respective weight × respective cost

WACC = ( common stock × cost of equity ) + ( preferred stock × pre tax) + (weight of debt × After tax cost of debt) .....................2

we take here weight of debt is 30 percent

so put here value

WACC = 46% × 15.8% + 5% × 6.8% + 30% × 5.24 %

WACC = 0.0918

WACC = 9.18%