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 pre-tax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent?

WACC = 9.18%

Explanation:

given data

common stock = 46 percent

preferred stock = 5 percent

cost of equity = 15.8 percent

cost of preferred stock = 8.3 percent

pre-tax cost of debt = 6.8 percent

tax rate = 23 percent

solution

first we get here after tax cost of debt that is express as

after tax cost of debt = pretax cost of debt * (1 - relevant tax rate) ... 1

put here value and we get

after tax cost of debt = 6.8% * (1 - 0.23)

after tax cost of debt = 0.05236

after tax cost of debt = 5.24 %

and

now for WACC

WACC = respective weight * respective cost

WACC = (common stock * cost of equity) + (preferred stock * pre tax) + (weight of debt * After tax cost of debt) ... 2

we take here weight of debt is 30 percent

so put here value

WACC = 46% * 15.8% + 5% * 6.8% + 30% * 5.24 %

WACC = 0.0918

WACC = 9.18%