Problem 11-27 Marginal cost of capital [LO11-5]

Delta Corporation has the following capital structure:

	Cost (aftertax)			Weights			Weighted Cost
Debt (Kd)		9.1	%		40	%		3.64	%
Preferred stock (Kp)		10.6			10			1.06
Common equity (Ke) (retained earnings)		9.1			50			4.55
Weighted average cost of capital (Ka)								9.25	%

a. If the firm has $16 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").)

Capital structure size (X). ?? million.

b. The 9.1 percent cost of debt referred to earlier applies only to the first $12 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").)

Capital structure size (Z)

million