Problem 10-10 WACC Klose Outfitters Inc. believes that its optimal capital struc
ID: 2714635 • Letter: P
Question
Problem 10-10 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 $2 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $10 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 $6 million of debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $3.8 million.
What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal?
Explanation / Answer
Cost
Weight
Cost x Weight
New common stock
15%
70
1050
Debt (after tax)
6%
30
180
Total
100
1230
WACC = 1230 / 100 = 12.3%
Cost
Weight
Cost x Weight
New common stock
15%
70
1050
Debt (after tax)
6%
30
180
Total
100
1230
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