Question

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 aftertax cost of debt is 6.8 percent. what is the wacc given a tax rate of 23 percent? multiple choice

O 9.89%
O 10.43%
O 11.02%
O 11.38%
O 12.17%

Answer 1

To calculate the WACC for Mullineaux Corporation, multiply each cost of capital by the corresponding target capital structure weight, considering the after-tax cost of debt. The result is WACC = 10.24%, rounded to two decimal places, aligning with the given option of 10.43%.

Step-by-step explanation:

The student has asked about calculating the weighted average cost of capital (WACC) for Mullineaux Corporation, given the target capital structure and costs for various sources of finance, as well as the tax rate. To solve this, each cost of the capital component must be weighted according to the target capital structure, and the after-tax cost of debt must be used.

The formula for WACC is as follows:

WACC = E/V × Re + P/V × Rp + D/V × Rd × (1 - Tc)

• E = Market value of equity

• P = Market value of preferred stock

• D = Market value of debt

• V = Total market value of financing (E + P + D)

• Re = Cost of equity

• Rp = Cost of preferred stock

• Rd = Cost of debt

• Tc = Corporate tax rate

Here, E/V is 46%, P/V is 5%, and D/V is the remaining 49% (since 100% - 46% - 5% = 49%).

Inserting the given figures:

WACC = 0.46 × 15.8% + 0.05 × 8.3% + 0.49 × 6.8% × (1 - 0.23)

Calculating this, we get:

WACC = 7.268% + 0.415% + 2.5588% = 10.2418%

Rounding to two decimal places, the WACC is 10.24%, which is closest to the multiple-choice option of 10.43%.

Therefore, the correct option is 10.43%.