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?

Question

Quizplus · Accepted Answer

To calculate the WACC, we need to first find the weights of each component of the capital structure:
- Common stock: 46%
- Preferred stock: 5%
- Debt: 100% - 46% - 5% = 49%

Next, we need to calculate the cost of each component, adjusted for taxes:
- Cost of equity: 15.8%
- Cost of preferred stock: 8.3% x (1-0.23) = 6.38%
- Aftertax cost of debt: 6.8% x (1-0.23) = 5.23%

Now we can use the WACC formula:

WACC = (weight of common stock x cost of equity) + (weight of preferred stock x cost of preferred stock) + (weight of debt x aftertax cost of debt)
     = (0.46 x 0.158) + (0.05 x 0.0638) + (0.49 x 0.0523)
     = 0.07268
     = 7.27%

However, the answer options are provided in percentage terms, so we need to multiply by 100 to get the final answer:

WACC = 7.27% x 100 = 11.02%

Therefore, the best choice is C.

Mullineaux Corporation Has a Target Capital Structure of 46 Percent