Problem:
Klose Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 40%. Klose must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of rs = 15%. New common stock in an amount up to $8 million would have a cost of re = 17%. Furthermore, Klose can rise up to $4 million of debt at an interest rate of rd = 9%, and an additional $4 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $8.4 million. What is the WACC for the last dollar raised to complete the expansion? Please explain in detail and show your work.