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WACC Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 40%. 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 = 11%. New common stock in an amount up to $8 million would have a cost of r e = 12-5%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of r d = 9% and an additional $5 million of debt at r d = 13%. The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the WACC for the last dollar raised to complete the expansion?

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter
Section
Chapter 10, Problem 10P
Textbook Problem

WACC Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of rs = 11%. New common stock in an amount up to $8 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 = 9% and an additional $5 million of debt at rd = 13%. The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the WACC for the last dollar raised to complete the expansion?

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Chapter 10 Solutions

Fundamentals of Financial Management (MindTap Course List)
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