Compute cost of retained earnings and common equity and wacc

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

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