Question

Olsen Outfitters Inc, believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 11%. New common stock in an amount up to $10 million would have a cost of re-13.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of ra = 11% and an additional $5 million of debt at - 13%. The CFO estimates that a proposed expansion would require an investment of $7.5 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut 11 A = = = V General A A Wrap Text Merge & Center - $ :.: % , Number Σ AutoSum : A Fill Sort & Clear Filter Editing Formatting as Table Styles Styles Find & Select Alignment Cells Calibri E Copy Paste Format Painter BIU - D Clipboard Font R123 QY OZ RA 23 OLSEN WACC REFormula Bar RC R D RE RE RG RH RI RU R K RL RM RN 24 TOTAL AMOUNT REQUIRED FOR EXPANSION COMMON EQUITY = 70% DEBT = 30% 7500000 5250000 2250000 25 26 27 28 29 30 RETAINED EARNINGS AVAILABLE SO REMAINING WILL BE NEW EQUITY 2000000 3250000 (5250000 - 2000000] DEBT (LESS THAN 4 MILLION @11%) 2250000 COST OF DEBT (AFTER TAX) = 11%*(1-0.40) = 6.60% 34 35 36 CALCULATION OF WACC SOURCE AMOUNT WEIGHT COC (%) DEBT RETAINED EARNINGS NEW EQUITY 38 2250000 2000000 3250000 7500000 WEIGHTED COST A*B 1.98% 2.93% 5.63% 0.3000 6.60% 0.2667 11.00% 0.4333 13.00% 1.0000 WACC ANSWER ---->>> 10.55% 40 41 42 HIM Rea convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean WACC RI O KE CAPM UTILITY, SHARPE, beta ferences: CF493 YIELD bond portfolio BO! 120% D E R * o *0 ENG 25-11-2019