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 = 15%. New common stock in an amount up to $10 million would have a cost of re = 19%. Furthermore, Klose can raise up to $2 million of debt at an interest rate of rd = 9%, and an additional $3 million of debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.8 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

Explanation / Answer

Debt required = weight of debt*capital budget = 0.3*5.8 = 1.74m

equity required = capital budget-debt required = 5.8-1.74 = 4.06m

Wacc = cost of debt*(1-tax rate)*weight of debt+cost of equity*weight of equity

=9*(1-0.4)*1.74/5.8+15*1/5.8+19*(4.06-1)/5.8

=14.23%

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.