Sub: Finance Topic: Cost of Capital
Finding cost of retained earnings, common equity and WACC.
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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 it