Problem:
The purpose of this problem is to calculate the break point associated with the exhaustion of retained earnings. The information needed to do this calculation is below:
Weights of different equity types: 40% long-term debt; 10% preferred stock; and 50% common equity (consisting of retained earnings or common stock, or both).
Costs of the different types of equity:
Debt: 9.4%
Preferred Stock: 12.7%
Common Equity: 14.79%
(Expected) earnings available to common shareholders: $7,000,000