Atlastitsover, Inc. (aka “ALIO”) is evaluating its cost of capital under alternative financing arrangements. In consultation with investment bankers, ALIO expects to be able to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a $2.50 per share dividend at $25 a share. The common stock of ALIO is currently selling for $20.00 a share. ALIO expects to pay a dividend of $1.50 per share next year. Market analysts foresee a growth in dividends in Invest stock at a rate of 5% per year. Alio's marginal tax rate is 35%.
Calculate the cost of debt, cost of preferred stock and cost of equity.
If ALIO raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is ALIO’s cost of capital?
If ALIO raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is ALIO’s cost of capital?