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 17 percent, the cost of preferred stock is 6.5 percent, and the pre-tax cost of debt is 8.3 percent. What is the firm's WACC given a tax rate of 33 percent?

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Zviko Zviko · Answer 1 · 2020-08-26T05:15:14+02:00

Answer:

the firm's WACC is 10.29 %.

Explanation:

Weighted Average Cost of Capital (WACC) is the weighted return required by all providers of Permanent Sources of Capital to the firm.

WACC = ke × (e/v) + kp × (p/v) + kd × (d/v)

ke = cost of equity

= 17%

e/v = weight of equity

= 0.41

kp = cost of preference stocks

= 6.50 %

p/v = weight of preference stocks

= 0.04

kd = cost of debt

= interest × ( 1 - tax rate)

= 8.30 % × ( 1 - 0.33)

= 5.561 %

d/v = weight of debt

= 0.55

Therefore,

WACC = 17% × 0.41 + 6.50 % × 0.04 + 5.561 %× 0.55

= 10.29 %