Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% 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 = 12%. New common stock in an amount up to $8 million would have a cost of re = 14.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 10% and an additional $5 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $3.4 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. 9:15 pm
Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% 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 = 12%. New common stock in an amount up to $8 million would have a cost of re = 14.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 10% and an additional $5 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $3.4 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. 9:15 pm
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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Transcribed Image Text:Olsen Outfitters Inc. believes that its optimal capital
structure consists of 70% common equity and
30% 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 = 12%. New common stock in an
amount up to $8 million would have a cost of re =
14.0%. Furthermore, Olsen can raise up to $4 million
of debt at an interest rate of rd = 10% and an
additional $5 million of debt at rd = 11%. The CFO
estimates that a proposed expansion would require
an investment of $3.4 million. What is the WACC for
the last dollar raised to complete the expansion?
Round your answer to two decimal places.
9:15 pm
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