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?
a. 9.89 percent
b. 10.43 percent
c. 11.02 percent
d. 11.38 percent
e. 2.17 percent

Answer 1

Answer:

c. 11.02 percent

Explanation:

Weighted Average Cost of Capital (WACC) is the return that is required by the long term providers of Finance for the Business.

WACC = Ke × E/V + Kp × P/V + Kd × D/V

Where,

Ke = Cost of Equity

     = 15.8 %

E/V = Market Weight of Equity

       = 0.46

Kp = Cost of Preference Stock

     = 8.3 %

P/V = Market Weight of Preference Stock

      = 0.05

Kd = After tax Cost of Debt

     = 6.8 %

D/V = Market Weight of Debt

      = 0.49

Therefore,

WACC = 15.8 % × 0.46 + 8.3 % × 0.05 + 6.8 % × 0.49

           = 11.015 or 11.02 %