Question
Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt (Kd) 5.5 %...
Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt (Kd) 5.5 % 25 % 1.38 % Preferred stock (Kp) 10.5 25 2.63 Common equity (Ke) (retained earnings) 10.5 50 5.25 Weighted average cost of capital (Ka) 9.25 %
a. If the firm has $26 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 5.5 percent cost of debt referred to earlier applies only to the first $18 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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