Olsen Outfitters Inc. believes that its optimal capital structure consists of 60% common equity and 40% 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 = 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 $2 million of debt at an interest rate of rd = 9% and an additional $5 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $3.2 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

Olsen Outfitters Inc. believes that its optimal capital structure consists of 60% common equity and 40% 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 = 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 $2 million of debt at an interest rate of rd = 9% and an additional $5 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $3.2 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 24P

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