Tortuga, Inc. is looking to raise $4 million for new equipment to enhance the efficiency of itsoperations. The firm currently is capitalized with 250,000 shares of equity at a market priceof $35 per share and also has $2,000,000 of debt with an interest rate of 9%. The companybelieves that with the new capital they could achieve an EBIT of $1,500,000. Assume newequity could be issued at current market price and that new debt would still carry a 9%coupon. The company has a 25% marginal tax rate. Should Tortuga issue Equity or Debt?Debt, because EPS will be $2.88Debt, because EPS will be $1.95O Equity, because EPS will be $2.72Equity, because EPS will be $2.13

Tortuga should issue equity or debt whichever has the highest EPS after expansion.

Answered: Tortuga, Inc. is looking to raise $4…

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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Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 40%. Olsen must raise additional capital to fund it upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 11%. New common stock in an amount up to $10,000 would have a cost of re = 12.5%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 9% and an additional $3 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $6.8 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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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
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