Delta Corporation has the following capital structure: Cost Weighted (after-tax) Weights Cost Debt 8.1% 35% 2.84% Preferred stock (Kp) 9.6 5 .48 Common equity (Ke) (retained earnings) 10.1 60 6.06 Weighted average cost of capital (Ka) 9.38% a. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings? b. The 8.1 percent cost of debt referred to earlier applies only to the first $14 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?
Delta Corporation has the following capital structure:
Cost Weighted
(after-tax) Weights Cost
Debt 8.1% 35% 2.84%
Common equity (Ke) (
a. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings?
b. The 8.1 percent cost of debt referred to earlier applies only to the first $14 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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