Marginal cost of capital
Response to the following problem:
Delta Corporation has the following capital structure:
Cost (aftertax) Weights Weighted Cost
Debt 6.1% 25% 1.53%
Preferred stock (Kp) 7.6 10 76
Common equity (Ke) (retained earnings) 15.1 65 9.82
Weighted average cost of capital (Ka) 12.11%
a. If the firm has $26 million in retained earnings, at what size capital structure will the firm run out of retained earnings?
b. The 7.1 percent cost of debt referred to above applies only to the first $13 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?