Question

Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% 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 rs = 10%. New common stock in an amount up to $10 million would have a cost of re = 12.5%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 11% and an additional $5 million of debt at rd = 13%. The CFO estimates that a proposed expansion would require an investment of $6.5 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

Answer 1

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