Question: Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt (Kd) 6.5 % 10 % 0.65 % Preferred stock (Kp) 5.2 25 1.30 Common equity (Ke) (retained earnings) 9.5 65 6.18 Weighted average cost of capital (Ka) 8.13 %
a. If the firm has $39 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 6.5 percent cost of debt referred to earlier applies only to the first $17 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").) HintsReferenceseBook & Resources WorksheetDifficulty: AdvancedLearning Objective: 11-05 The cost of capital may eventually increase as larger amount of financing are utilized. Check my work ©2017 McGraw-Hill Education. All rights reserved.