Question
Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt ( K d ) 6.6 % 20 % 1.32 % Preferred stock
Delta Corporation has the following capital structure:
| Cost (aftertax) | Weights | Weighted Cost | ||||||
Debt (Kd) |
| 6.6 | % |
| 20 | % |
| 1.32 | % |
Preferred stock (Kp) |
| 11.2 |
|
| 10 |
|
| 1.12 |
|
Common equity (Ke) (retained earnings) |
| 11.2 |
|
| 70 |
|
| 7.84 |
|
Weighted average cost of capital (Ka) |
|
|
|
|
|
|
| 10.28 | % |
a. If the firm has $49 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)
b. The 6.6 percent cost of debt referred to earlier applies only to the first $23 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)
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