Delta Corporation has the following capital structure: Cost (aftertax) Weights W

Question

Delta Corporation has the following capital structure:

Cost (aftertax) Weights Weighted cost

Debt (Kd) 7.6 % 5 % .38 %

Preferred stock (Kp) 5.8 15 .87

Common equity (Ke) (retained earnings) 12.2 80 9.76

Weighted average cost of capital (Ka) 11.01 %

(a) If the firm has $32 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions. Omit the "$" sign in your response.)

Capital structure size (X): $ ?million

The 7.6 percent cost of debt referred to above applies only to the first $8 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt?(Enter your answer in millions. Omit the "$" sign in your response.)

Capital structure size (Z): $ ? million

The 7.6 percent cost of debt referred to above applies only to the first $8 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt?(Enter your answer in millions. Omit the "$" sign in your response.)

Explanation / Answer

Hi, Please find answers as follows: Part A = Retained Earnings/Percentage of Retained Earning in The Capital Structure = 32/.80 = 40 million Part B = Amount of Lower Debt Cost/Percentage of Debt in The Capital Structure = 8/.05 = 160 million. Thanks, Aman

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