Question: 1. The Mays Co. has established a target capital structure of 35 percent debt, 15 percent preferred, and 50 percent common equity. Mays must pay

1. The Mays Co. has established a target capital structure of 35 percent debt, 15 percent preferred, and 50 percent common equity. Mays must pay an 8 percent flotation fee if it issues new common stock. The current market price of the firms stock is $75; its last dividend was $1.60, and its expected growth rate is 3 percent. The firms projected net income for next year is $146 million and it maintains a dividend payout ratio of 40 percent. The capital budget for next year is $200,000,000.

a. What is the cost of retained earnings?

b. What is the cost of a new common stock issue?

c. What is the maximum capital budget that Mays can support with retained earnings?

d. Given the $200,000,000 budget, what will be Mays marginal cost of common equity?

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