Question

10-2: Basic Definitions WACC Klose Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% 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 $8 million would have a cost of re = 16%. Furthermore, Klose can raise up to $2 million of debt at an interest rate of ra = 11%, and an additional $3 million of debt at d = 12%. The CFO estimates that a proposed expansion would require an investment of $3.0 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. 38.50 % Hide Feedback Incorrect Check My Work (1 remaining)

Answer 1

rate positively ..

	Amount of investment			3
	equity=			1.65
	Debt=			1.35
	equity from retained earning =			1
	New equity to be raised =			0.65
	Debt to be raised =			1.35
	Post tax cost of debt = 11%*(1-40%)			6.600%
	Computation of WACC
	Source	Amt	weight	Cost of capital	weight * cost
	Debt	1.35	45.00%	6.60%	2.97%
	Retained earning	1	33.33%	13.00%	4.33%
	new equity	0.65	21.67%	16.00%	3.47%
	Total	3			10.77%
	Answer =	10.77%