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Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35%...

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 its upcoming expansion. The firm will have $1 million of retained earnings with a cost of rs = 12%. New common stock in an amount up to $6 million would have a cost of re = 13.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 11% and an additional $3 million of debt at rd = 15%. The CFO estimates that a proposed expansion would require an investment of $3.3 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

Solutions

Expert Solution

Sol:

WACC = 10.44

Calculations:

jeff jeffy answered 2 years ago
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