Klose Outfitters Inc. believes that its optimal capital structure consists of 35
ID: 2715042 • Letter: K
Question
Klose Outfitters Inc. believes that its optimal capital structure consists of 35% common equity and 65% 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 $9 million would have a cost of re = 14%. Furthermore, Klose can raise up to $3 million of debt at an interest rate of rd = 9%, and an additional $6 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $3.7 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.
%
Explanation / Answer
Klose Outfitters Inc. believes that its optimal capital structure consists of 35
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