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Mullineaux Corporation has a target capital structure of 41 percent common stock, 4 percent preferred stock, and 55 percent debt. Its cost of equity is 17 percent, the cost of preferred stock is 6.5 percent, and the pre-tax cost of debt is 8.3 percent. What is the firm's WACC given a tax rate of 33 percent?

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Answer:

the firm's WACC is 10.29 %.

Explanation:

Weighted Average Cost of Capital (WACC) is the weighted return required by all providers of Permanent Sources of Capital to the firm.

WACC = ke × (e/v) + kp × (p/v) + kd × (d/v)

ke = cost of equity

    = 17%

e/v = weight of equity

     = 0.41

kp = cost of preference stocks

    = 6.50 %

p/v = weight of preference stocks

     = 0.04

kd = cost of debt

    = interest × ( 1 - tax rate)

    = 8.30 % × ( 1 - 0.33)

    = 5.561 %

d/v = weight of debt

     = 0.55

Therefore,

WACC =  17% × 0.41 + 6.50 % × 0.04 + 5.561 %× 0.55

           =  10.29 %

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