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Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rat

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Answer #1

Calculate the WACC for the last dollar raised as follows:

The firm’s capital structure contains 65% common equity and 35% of debt.

Tax rate is 25%

Proportion

Cost of capital

Prop × Cost of capital

Equity

65%

14.5%

9.425%

Debt

35%

8.25% (WN)

2.8875%

WACC

12.31%

Therefore, the WACC for the last dollar raised is 12.31%.

Working Note:

LC8PXedq4lqJZJqkj404I5qAaMJWhOZy9dz3ytHi

Therefore, the after-tax cost of debt is 8.25%

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