Question 7
Assume that a firm has the following capital structure and costs:
Source of Capital
for source
Long-term debt
7.6% (this is the BEFORE-tax cost)
Preferred stock
11.2%
Common-stock equity
$k_{RE} = 14.3%
$k_s = 15.2%
The firm has a tx rate of 40%.
The firm has $1,000,000 of retained earnings available.
At what level of total financing will retained earnings be exhausted (breaking point)?
$4,000,000
$2,000,000
$5,000,000
$500,000
$400,000
Target Market Proportions
40%
10%
50%
Cost
11 pts
