Calculating WACC: Mullineaux Corporation has a target capital structure of 50 percent common stock, 5 percent

Calculating WACC: Mullineaux Corporation has a target capital structure of 50 percent common stock, 5 percent

 

answer:

a.       WACC = W1*Ke +W2*Kp + W3*Kd*(1-Tax rate)

= 0.5*15+0.05*6+0.45*8(1-0.35)

= 10.14%

b.      Cot of preferred stock = 6%

After tax cost of debt = 8*(1-35%) = 5.2%

So debt effective cost is less than preferred stock that’s why debt is preferred mode.

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