Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and a 35 percent debt. Its cost of equity is 12.5 percent, the cost of preferred stock is 5.5 percent, and the cost of debt is 7.2 percent. The relevant tax rate is 35 percent.

a. What is Mullineaux’s WACC?

b. The company president has approached you about Mullineax’s capital structure. He wants to know why the company doesn’t use more preferred stock financing, since its cost less than debt. What would you tell the president?

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

The above situation analyse effect of WACC when the capital structure is changed.

The company should use more of debt as after tax cost of debt is 5.2% only (8%*(1-0.35)). When considering option for capital structure one need to look at after tax cost of debt. Because interest expenses are tax deductible. But the preferred dividend are paid out of Net Profits after taxes. Hence the cost of debt is lower than preferred stock.

...as the discount rate in net present value (NPV) project appraisal techniques.1
The weighted-average cost of capital (WACC) represents the overall cost of capital for a company, including the costs of equity and cost of debt, weighted according to the proportion of each source of finance within the business. In easy words WACC measures a company’s cost to borrow money.
The WACC equation is the cost of each capital component multiplied by its...

...CAPITAL BUDGETING
Cost of Capital Evaluating Cash Flows
Payback, discounted payback NPV IRR, MIRR
The Cost of Capital
• Cost of Capital Components
– Debt – Common Equity
• WACC
Should we focus on historical (embedded) costs or new (marginal) costs?
The cost of capital is used primarily to make decisions which involve raising and investing new capital. So, we should focus on marginal costs.
What types of long-term capital do organizations use?
nLong-term...

...at 4.5%
* JP Morgan has issued an estimate for Expected Market Return at 8.5%
* Euribor is 2%
* Before tax cost of debt = 5%
* Tax rate = 30%
Please calculate the weighted average cost of capital (WACC) for this firm.
2. You are now asked to calculate the WACC for a toothpaste manufacturer with the following data:
* Average share price for last 6 months = €34/ share
* Current year’s dividend = €3/ share
* Applicable...

...What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets...

...1. Why do think Larry Stone wants to estimate the firm’s hurdle rate? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Please explain.
(10% weighting)
Answer
The hurdle rate is the rate of return a firm has to offer finance providers to induce them to buy and hold financial security. (Arnold,2007). This is also known as cost of capital or weighted average cost of capital. The returns offered by alternative securities with the same...

...technology vendors. HP also has strong services and consulting business around its products and partner products. In this analysis, we will use multiple resources to determine HP’s weighted-average cost of capital (WACC).
Target Capital Structure
The first step in calculating our WACC was to determine the target capital structure. The target structure was determined using market value numbers. Using market value numbers was the most logical method to...

...weighted average cost of capital (WACC) to be 8.3%. I find error in this calculation as a result of the following points of disagreement:
a) Weighting of Capital Structure: Use of book values of capital rather than the market values
b) Cost of Debt Calculation: Incorrect method for calculating debt
c) Tax Rate: Use of a tax rate derived from the summation of state and statutory taxes instead of the firm's marginal tax rate
2. Revised Calculation of...

...Weighted Average Cost of Capital
Introduction and objectives
This paper aims at describing a way to compute the Weighted Average Cost of Capital (WACC). This method is often used by company management to determine the economic feasibility of different projects and thus to compute the NPV of a specific project by discounting cash-flows. The WACC determines the return that the company should generate to satisfy its debt-holders. For the company, it consists in a...