Klose Outfitters Inc. believes that its optimal capital structure consists of 60% common equity 40% debt, and it tax rate is 40%. Klose must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retianed earnings with cost of rs= 12%. New common stock in an amount up to $6 million would have a cost of re = 15%. Furthermore, Klose can raise up to $3 million of debt at an interest rate of rd = 10% and an additional $4 million debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.9 million. What is the WACC for that last dollar raised to complete the expansion?
Klose Outfitters Inc. believes that its optimal capital structure consists of 60% common equity 40% debt, and it tax rate is 40%. Klose must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retianed earnings with cost of rs= 12%. New common stock in an amount up to $6 million would have a cost of re = 15%. Furthermore, Klose can raise up to $3 million of debt at an interest rate of rd = 10% and an additional $4 million debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.9 million. What is the WACC for that last dollar raised to complete the expansion?
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 11P
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Klose Outfitters Inc. believes that its optimal capital structure consists of 60% common equity 40% debt, and it tax rate is 40%. Klose must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retianed earnings with cost of rs= 12%. New common stock in an amount up to $6 million would have a cost of re = 15%. Furthermore, Klose can raise up to $3 million of debt at an interest rate of rd = 10% and an additional $4 million debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.9 million. What is the WACC for that last dollar raised to complete the expansion?
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