Problem:

The purpose of this problem is to calculate the break point associated with the exhaustion of retained earnings. The information needed to do this calculation is below:

Weights of different equity types: 40% long-term debt; 10% preferred stock; and 50% common equity (consisting of retained earnings or common stock, or both).

Costs of the different types of equity:

Debt: 9.4%

Preferred Stock: 12.7%

Common Equity: 14.79%

(Expected) earnings available to common shareholders: $7,000,000