How do you calculate the WACC for Olsen Outfitters Inc. given its capital structure and costs of equity and debt?

To calculate the WACC for Olsen Outfitters Inc., use the formula: WACC = w_d * r_d * (1 - T) + w_e * r_e, where w_d is the weight of debt, r_d is the cost of debt, T is the tax rate, w_e is the weight of equity, and r_e is the cost of equity. Given that Olsen has a capital structure of 45% debt and 55% equity, a tax rate of 40%, a cost of debt of 9% for the first $4 million and 13% for an additional $5 million, and a cost of equity of 11% for retained earnings and 12.5% for new stock, the WACC for the last dollar raised can be calculated accordingly.

Olsen Outfitters Inc. has a target capital structure of 55% common equity and 45% debt. The tax rate is 40%. The firm can raise $4 million of debt at an interest rate of 9% and an additional $5 million at 13%. The cost of retained earnings is 11%, and the cost of new common stock is 12.5%. To find the WACC for the last dollar raised, we need to consider the cost of the last dollar of debt and equity raised. The WACC formula is: WACC = (Weight of Debt * After-tax Cost of Debt) + (Weight of Equity * Cost of Equity). The last dollar raised will likely be from the more expensive source, which is the new common stock at 12.5%. Therefore, the WACC will reflect this higher cost of equity along with the weighted average of the debt costs.