Problem 11-27 (Algo) Marginal cost of capital [LO11-5] Delta Corporation has the following capital structure: Debt (Kd) Preferred stock (Kp) Common equity (Ke) (retained earnings) Weighted average cost of capital (Ka) Cost (aftertax) 9.6% Weighted Weights Cost 30% 2.88% 7.8 5 0.39 9.2 65 5.98 9.25% a. If the firm has $52 million in retained earnings, at what size capital structure will the firm run out of retained earnings? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10". Capital structure size (X) million b. Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10".The 9.6 percent cost of debt referred to earlier applies only to the first $24 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? Capital structure size (Z) million
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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Problem 11-27 (Algo) Marginal cost of capital [LO11-5]
Delta Corporation has the following capital structure:
Debt (Kd)
Preferred stock (Kp)
Cost
(aftertax)
9.6%
Common equity (Ke) (retained earnings)
Weighted average cost of capital (Ka)
Weighted
Weights
Cost
30%
2.88%
7.8
5
0.39
9.2
65
5.98
9.25%
a. If the firm has $52 million in retained earnings, at what size capital structure will the firm run out of retained earnings?
Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10".
Capital structure size (X)
million
b. Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10". The 9.6 percent cost of debt referred to
earlier applies only to the first $24 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?
Capital structure size (Z)
million](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4839173c-c6a1-4c2a-940f-7c13971d0732%2F59d23e3d-e3a2-45b8-be41-dd73d9ace256%2Fb09x41p_processed.jpeg&w=3840&q=75)
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