Mary Mickaella R.

Ventura

BSA 3-A

Chapter 9 – Problem 9 & 14 (p. 466)

9. Calculating WACC [LO3] Mullineaux Corporation has a target capital structure of 60 percent common
stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of
preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent.

a. What is Mullineaux’s WACC?

WACC = .60(.14) + .05(.06) + .35(.08)(1 – .35) = .1052 or 10.52%

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?

.08(1 – .35) = .0520 or 5.20%

14. WACC [LO3] Jungle, Inc., has a target debtequity ratio of 1.05. Its WACC is 9.4 percent, and the tax
rate is 35 percent.

a. If Jungle’s cost of equity is 14 percent, what is its pretax cost of debt?

WACC = .094 = (1/2.05)(.14) + (1.05/2.05)(1 – .35)RD

RD = .0772 or 7.72%

b. If instead you know that the after tax cost of debt is 6.8 percent, what is the cost of equity?

WACC = .094 = (1/2.05)RE + (1.05/2.05)(.068)

RE = .1213 or 12.13%