Question
1.) Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at r d =11%, and its common stock currently
1.)
Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at rd=11%, and its common stock currently pays a $2.16 dividend per share. The stock's price is currently $24.22, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company's capital structure consists of debt?
2.) Klose Outfitters Inc. believes that its optimal capital structure consists of 60% common equity and 40% debt, and its tax rate is 40%. Klose must raise additional capital to fund its upcoming expansion. The firm will have $2 million of new retained earnings with a cost of rs=10.19%. New common stock in an amount up to $6 million would have a cost of re=14.43%. Furthermore, Klose can raise up to $3 million of debt at an interest rate of rd=10% and an additional $4 million of debt at rd=12%. The CFO estimates that a proposed expansion would require an investment of $5.9 million. What is the WACC for the last dollar raised to complete the expansion?
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