The purpose of this problem is to calculate the break point associated with the

Question

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:

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

So, what is the break point asssociated with the exhaustion of retained earnings?

Explanation / Answer

ASSUMING 100% RETENTION RATIO

BREAK EVEN ASSOCIATED WITH EXHAUSTION OF RETAINED EARNINGS

0.5X = 7000000

X = 7000000/0.5

X= 14000000

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