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Calculating WACC for a Corporation

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A Corp. has no debt but can borrow at 8 %. The firm's WACC is currently 12% and has tax rate of 35%.

a. What is the cost of equity?

b. If the Corp. converts to 25 % debt,what will cost of equity be? 50 %?

c. What is shadow's WACC for part b: 25 % and 50 %.

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WACC is the weighted average cost of capital whereby the target proportions of debt and equity along with the component costs of capital are used to calculate. The equation can be summarized as follows: -

WACC = WdKd(1 - T) + WcKs where Wd is the weight of debt
Kd is the cost of ...

Solution Summary

This solution is comprised of a detailed explanation to calculate what is the cost of equity, if the Corp. converts to 25 % debt, what will cost of equity be? 50 %?, and what is shadow's WACC for part b: 25 % and 50 %.

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Mullineaux Corporation: Calculating WACC

Calculating WACC. Mullineaux Corporation has a target capital structure of 65 percent common stock, 10 percent preferred stock, and 25 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is
7.5 percent. The relevant tax rate is 35 percent.

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, since it costs less than debt. What would you tell the president?

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