Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of rs 5 11%. New common stock in an amount up to $8 million would have a cost of re 5 12.5%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd 5 9% and an additional $5 million of debt at rd 5 13%. The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the WACC for the last dollar raised to complete the expansion?

Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of rs 5 11%. New common stock in an amount up to $8 million would have a cost of re 5 12.5%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd 5 9% and an additional $5 million of debt at rd 5 13%. The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the WACC for the last dollar raised to complete the expansion?

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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