Compute cost of retained earnings and common equity and wacc

Assignment Help Finance Basics

Reference no: EM1315242

Compute cost of retained earnings and common equity and WACC

Cost of Capital

Atlas Inc. is planning to invest in a 4-year project which has the same risk as the firm's existing assets and operations. The project requires a $150,000 initial investment and is expected to generate equal annual after-tax cash flows for the next 4 years. In consultation with investment bankers, Atlas expects to be able to issue new debt at par with a coupon rate of10% and to issue new preferred stock with a $3 per share dividend at $30 a share. The common stock of the company is currently selling for $25.00 a share. Atlas Inc. expects to pay a dividend of $1 per share next year. Market analysts foresee a growth in dividends in Atlas stock at a rate of 10% per year. Atlas's marginal tax rate is 30%.

(a) If Atlas raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is its cost of capital?

(b) If Atlas's beta is 1.2, market risk premium is 7.5%, and the risk free rate is 5.0%, compute the discount rate the firm should use to evaluate this project?

(c) What is the minimum cash flow per year this project should generate over the next four years to be accepted by the company

(d) Atlas is also considering financing this project without issuing preferred stock. The company's optimal debt-to-equity ratio with no preferred stock in its capital structure is 0.25. If the management is expecting annual cash flows of $40,000, should the company accept this project under this scenario?

Reference no: EM1315242

Questions Cloud

Federal government budget expenditures : Bush proposed for government expenditures in the case of a recessionary gap? What is the effect of his policies on the federal government budget?

Regression equation to estimate value of dependent variable : A. Determine the regression equation. B. Determine the estimated sales if 40 contacts are made.

Stimulate the economy in case of recessionary gap : Fiscal policy refers to the use of government expenditures or tax policy to influence the aggregate demand for a specific purpose.

What is a minimum time necessary for crossing : A person exerts a horizontal force of F = 169N in the test apparatus. (h = 0.32m.) Find the horizontal force M that his flexor muscle exerts on his fore arm.

Compute cost of retained earnings and common equity and wacc : Compute cost of retained earnings and common equity and WACC and What is the minimum cash flow per year this project should generate over the next four years to be accepted by the company

Computing cumulative probabilities of numbers : Compute cumulative probabilities for these numbers in second column. Then create a histogram illustrating data distribution. Using generated Normal probability table, determine probability of Pr(X

Correlation and to test the significance of correlation : Can we conclude that there is a positive association between the size of the home and the selling price? Use the .05 significance level.

Healthcare it : Summarizing everything you have learned related to the Healthcare IT, describe what has been the most surprising or the interesting lesson that is learned.

Discussing positive consumption externality : Define in general the term "internalize the externality" and explain its application in this case. Discuss a policy other than a tax or subidy that could cause individuals to internalize the externality. Explain briefly.

User Account

All Pages