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 $3 million of retained earnings with a cost of r_s = 15%. New common stock in an amount up to $7 million would have a cost of r_e = 18%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of r_d = 11% and an additional $4 million of debt at r_d = 13%. The CFO estimates that a proposed expansion would require an investment of $6.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

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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 Calibri Dr General E Copy Paste Format Painter Clipboard -11AA = = = D- DA Wrap Text Merge & Center - BI U $ :.: % , Number Σ AutoSum : A Fill Sort & Clear Filter Editing Formatting as Table Styles Styles Find & Select Font Alignment Cells RH38 RB RC RD RE RE RG RH RI RJ RK RL RM RN 23 QYQZ OLSEN RA WACC 24 25 26 27 28 29 30 TOTAL AMOUNT REQUIRED FOR EXPANSION COMMON EQUITY = 70% DEBT = 30% 6600000 4620000 1980000 RETAINED EARNINGS AVAILABLE SO REMAINING WILL BE NEW EQUITY 3000000 1620000 [4620000 - 3000000] DEBT (LESS THAN 4 MILLION @11%) 1980000 COST OF DEBT (AFTER TAX) = 11%*(1-0.40) = 6.60% CALCULATION OF WACC SOURCE AMOUNT WEIGHT COC (%) 34 35 36 37 38 DEBT RETAINED EARNINGS NEW EQUITY 1980000 3000000 1620000 6600000 39 WEIGHTED COST A*B 1.98% 6.82% 4.42% 0.3000 6.60% 0.4545 15.00% 0.2455 18.00% 1.0000 WACC ANSWER ---->>> 13.22% 40 41 42 HI Rea M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio RESI el KE CAPM UTILITY, SHARPE, beta ferences: CF670 cap stru WACC BOJ 120% ODOB * * *0 ENG 07-11-2019