Question: Delta Corporation has the following capital structure: a. If the firm has $18 million in retained earnings, at what size capital structure will the firm

Delta Corporation has the following capital structure:

Weighted Cost 2.84% 48 Cost (aftertax) Weights Debt Preferred stock (Kp) Common

a. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings?

b. The 8.1 percent cost of debt referred to earlier applies only to the first $14 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?

Weighted Cost 2.84% 48 Cost (aftertax) Weights Debt Preferred stock (Kp) Common equity (K) 8.1% 35% 9.6 (retained earnings) 10.1 60 6.06 Weighted average cost of capital (Ka) 9.38%

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