Question
Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt ( K d ) 7.6 % 5 % 0.38 % Preferred stock
Delta Corporation has the following capital structure:
Cost (aftertax) | Weights | Weighted Cost | |||||||
Debt (Kd) | 7.6 | % | 5 | % | 0.38 | % | |||
Preferred stock (Kp) | 5.8 | 15 | 0.87 | ||||||
Common equity (Ke) (retained earnings) | 12.2 | 80 | 9.76 | ||||||
Weighted average cost of capital (Ka) | 11.01 | % | |||||||
a. If the firm has $32 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 7.6 percent cost of debt referred to earlier applies only to the first $8 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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