Equity Financing Needed for Expansion = Investment * wE = $3.2 million * 0.65 = $2.08 million
First $1 million will be financed by retained earnings and the last $1.08 million will be financed by new common stock. So, kE for last dollar raised is 14.5%.
Debt Financing Needed for Expansion = Investment * wD = $3.2 million * 0.35 = $1.12 million
So, all of debt financing can be raised at the kD of 9%
So, WACC for last dollar raised = [wD * kD * (1 - t)] + [wE * kE]
= [0.35 * 9% * (1 - 0.25)] + [0.65 * 14.5%]
= 2.3625% + 9.425% = 11.7875%, or 11.79%
eBook Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and...
Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $3 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $7 million would have a cost of re = 14.5%. Furthermore, Olsen can raise up to $4 million of debt at an interest...
Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $3 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $7 million would have a cost of re - 14.5%. Furthermore, Olsen can raise up to $4 million of debt at an interest...
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WACC 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 $5 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 re = 19%. Furthermore, Olsen can raise up to $3 million of debt at an...
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WACC 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 $5 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 re = 19%. Furthermore, Olsen can raise up to $3 million of debt at an...
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