Question

Klose Outfitters Inc. believes that its optimal capital structure consists of 60%
common equity and 40% debt, and its tax rate is 40%. Klose 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 $6 million would have a cost of
re 15%. Furthermore, Klose can raise up to $3 million of debt at an interest rate of
rd 10% and an additional $4 million of debt at rd 12%. The CFO estimates that a
proposed expansion would require an investment of $5 9 million. What is the WACC for
the last dollar raised to complete the expansion?

Answer 1