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 $4 million of retained earnings with a cost of r_s = 14%. New common stock in an amount up to $9 million would have a cost of r_e = 18%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of r_d = 9% and an additional $6 million of debt at r_d = 10%. The CFO estimates that a proposed expansion would require an investment of $11.4 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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Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at r_d = 8%, and its common stock currently pays a $2.75 dividend per share (D₀ = $2.75). The stock's price is currently $31.75, its dividend is expected to grow at a constant rate of 9% per year, its tax rate is 40%, and its WACC is 13.35%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

 

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Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r_d = 10% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D₀) was $2.55, its expected constant growth rate is 3%, and its common stock sells for $22. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 15%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets.

 

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2. What is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations.
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6. What is the WACC? Round your answer to two decimal places. Do not round your intermediate calculations.
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10. Which projects should Empire accept?
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Answer rating: 100% (QA)

1 WACC for the last dollar raised to complete the expansion for Olsen Outfitters Inc Given Optimal capital structure 70 common equity and 30 debt Tax ... View the full answer