Question

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 interest rate of ra = 11% and an additional $3 million of debt at rd = 13%. The CFO estimates that a proposed expansion would require an investment of $7.8 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
	Amt ($ million)	Weight	Cost	WACC
Common stock	7	0.39	19	7.39
Retained Earnings	5	0.28	15	4.17
Debt 1	3	0.17	6.6	1.1
Debt 2	3	0.17	7.8	1.3
	18			13.96
Cost of debt 1	11*0.60	6.60%
Cost of debt 2	13*0.60	7.80%