Klose Outfitters Inc. believes that its optimal capital structure consists of 70

Question

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 = 13%. New common stock in an amount up to $6 million would have a cost of re = 15%. Furthermore, Klose can raise up to $2 million of debt at an interest rate of rd = 10%, and an additional $3 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $5.1 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

Explanation / Answer

amount invested through equity = 0.7 * 5.1 = 3.57 million

amount investeed through debt = 0.3 * 5.1 = 1.53 million

WACC of last dollar

= (1/5.1) * 13% + (2.57/5.1) * 15% + (1.53/5.1) * 10%

= 13.11%

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