Question

Mullineaux Corporation has a target capital structure of 41 percent common stock, 4 percent preferred stock, and 55 percent debt. Its cost of equity is 19 percent, the cost of preferred stock is 6.5 percent, and the pre-tax cost of debt is 7.5 percent. What is the firm's WACC given a tax rate of 34 percent? A. 13.38 percent B. 10.77 percent C. 10.43 percent D. 9.87 percent

Answer 1

Ans.	Option   B 10.77%
	Particulars	Cost (a)	Capital structure (b)	WACC (a * b)
	Cost of equity	0.1900	41%	0.0779
	Cost of preferred stock	0.0650	4%	0.0026
	Cost of debt	0.0495	55%	0.0272
	Weighted average cost of capital (Total)			0.1077
	So the WACC is 10.77%
	*Calculations:
	*WACC is calculated on the after tax cost, so we need to calculate the after tax cost of debt.
	After tax cost of debt = Pre tax cost of debt * (1 - tax rate)
	0.075 * (1 - 0.34)
	0.075 * 0.66
	0.0495 or 4.95%