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Weighted Average Cost of Capital

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Mullineaux Corporation has a target capital structure of 60% common stock, 5% preferred stock, and 35% debt. Its cost of equity is 14%, the cost of preferred stock is 6%, and the cost of debt is 8%. The relevant tax rate is 35%.

A. What is Mullineaux's WACC?

B. The company president has approached you about Mullineaux's capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president?

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Solution Summary

The solution calculates Weighted Average Cost of Capital for Mullineaux Corporation.

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Weighted average Cost of Capital = E/V * Cost of Equity + D/V * cost of debt * (1-tax rate)

Answer A - Mullineaux's WACC

WACC = 60%*14 + 5%*6 + 35%*8*(1-0.35)
WACC = 8.4% + 0.3% + 1.82%
WACC = 10.52%

Answer B
Lets analyse to following situations..

Situation 1 - ...

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