1. Calculate the aftertax cost of debt under each of the following conditions. (Do not round intermediate...
Question:
1.
Calculate the aftertax cost of debt under each of the following conditions. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
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2.
Delta Corporation has the following capital structure:
Cost (aftertax) | Weights | Weighted Cost | |||||||
Debt (Kd) | 9.1 | % | 40 | % | 3.64 | % | |||
Preferred stock (Kp) | 10.6 | 10 | 1.06 | ||||||
Common equity (Ke) (retained earnings) | 9.1 | 50 | 4.55 | ||||||
Weighted average cost of capital (Ka) | 9.25 | % | |||||||
a. If the firm has $16 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").)
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b. The 9.1 percent cost of debt referred to earlier applies only to the first $12 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").)
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Intermediate Accounting
ISBN: 978-1119048541
11th Canadian edition Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy