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 $5 million of retained earnings with a cost of r_s = 14%. New common stock in an amount up to $9 million would have a cost of r_e = 17%. Furthermore, Klose can raise up to $3 million of debt at an interest rate of r_d = 9%, and an additional $6 million of debt at r_d = 11%. The CFO estimates that a proposed expansion would require an investment of $9.8 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

Answer 1

Calculation of WACC
	($ million)
Particulars	Amount	weight	Cost/Return	WACC
Debt	3	0.13	5.4	0.70
	6	0.26	6.6	1.72
Equity	9	0.39	17	6.65
Retained Earnings	5	0.22	14	3.04
	23			12.12
Kd ($ 3 million)post-tax	5.4
Kd ($ 6 million)post-tax	6.6
WACC for the last dollar raised 12.12%