Question
Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt (Kd) 5.2 % 10 % 0.52 % Preferred stock (Kp) 12.2 20
Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt (Kd) 5.2 % 10 % 0.52 % Preferred stock (Kp) 12.2 20 2.44 Common equity (Ke) (retained earnings) 7.1 70 4.97 Weighted average cost of capital (Ka) 7.93 % a. If the firm has $28 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 5.2 percent cost of debt referred to earlier applies only to the first $15 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?
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