Assume that All Concrete Construction Inc. has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $3,700,000 in after-tax income during the coming year, and it will retain 70 percent of those earnings. The current market price of the firm's stock is $52; its last dividend was $0.72, and its expected growth rate is 5.6 percent. All Concrete can issue new common stock at an 8 percent flotation cost.
a. What is the interest rate (cost) of retained earnings?
b. What is the interest rate (cost) of a new common stock issue?
c. What is the maximum capital budget that All Concrete can support with retained earnings?
d. Given a $4,500,000 budget, what will be All Concrete’s marginal cost (interest rate) on common equity?