Olsen Outfitters Inc. believes that its optimal capital structure consists of 50% common equity and 50% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $1 million of retained earningswith a cost of rs = 13%. New common stock in an amount up to $9 million would have a cost of re = 15.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of r = 10% and an additional $4 million of debt at ra = 14%. The CFOestimates that a proposed expansion would require an Investment of $3.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.%

WACC = 11.25%Explanation:Step 1: List the given valuesCost of retained earnings up to $1 million…

Answered: Olsen Outfitters Inc. believes that its…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Expected Rate of Return TE Project Cost 1 $2,000 16.00% 2 3,000 15.00 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of ra = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $56.00 per share. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Only projects…
Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of rs = 10%. New common stock in an amount up to $9 million would have a cost of re = 13.0%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 11% and an additional $6 million of debt at rd = 15%. The CFO estimates that a proposed expansion would require an investment of $7.4 million. What is the WACC for the last dollar raised તો
You would like to estimate the weighted average cost of capital for a new airine business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 8%. However, the new business will be 23% debt financed, and you anticipate its debt cost of capital will be 5%. If its corporate tax rate is 30%, what is your estimate of its WACC? The equity cost of capital is. (Round to two decimal places.)
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was $3.45, its expected constant growth rate is 3%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. % Which projects should Empire accept? -Select-Project A? Project B?
Annamz Corp. is looking at two possible capital structures. Currently, the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding. The market value of each stock is $6.00. The CEO of Annamz is thinking of leveraging the firm by selling $600,000 of debt financing. The cost of debt is 8% annually, and the current corporate tax rate for Annamz is 30%. What is the break-even EBIT for Annamz with these two possible capital structures?
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Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $9 million would have a cost of re = 15.5%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 11% and an additional $3 million of debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. %
Halfdome believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 25%. Halfdome must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of . New common stock in an amount up to $8 million would have a cost of . Furthermore, Halfdome can raise up to $4 million of debt at an interest rate of and an additional $5 million of debt at . The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the weighted average cost of capital (WACC) for the last dollar raised to complete the expansion? (Assume that cost of debt is 9% and cost of equity is 12.5%). 12.69% 8.45% 10.32% 9.91% None of the above
hi, this is my finance question. i need answer asap.
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 40% debt and 60% common equity. Its last dividend (Do) was $2.60, its expected constant growth rate is 4%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 11%, and Project B's return is 10%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. -Select- % c. Which projects should Empire accept?
Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $1 million of retained earnings with a cost of rs = 10%. New common stock in an amount up to $10 million would have a cost of re = 12.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 10% and an additional $4 million of debt at rd = 13%. The CFO estimates that a proposed expansion would require an investment of $8.4 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. %

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