Question

Ch 10 #9

Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of r_s = 10%. New common stock in an amount up to $10 million would have a cost of r_e = 11.0%. 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 $12.0 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