chapter 10 8. WACC Klose Outfitters Inc. believes that its optimal capital struc
ID: 2642832 • Letter: C
Question
chapter 10
8. WACC
Klose Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 40%. Klose 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 = 14%. Furthermore, Klose can raise up to $4 million of debt at an interest rate of rd = 11%, and an additional $5 million of debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $6.2 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.
= %
Explanation / Answer
Answer:
Weight Weight Capital Retained earnings 1 0.111111 14% Common stock 4 0.444444 18% Debt 4 0.444444 7% 9 1 WACC = 12.49%Related Questions
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