Essay on Atlas Metal Company

1473 Words Oct 24th, 2013 6 Pages
ATLAS METAL COMPANY CASE
Executive Summary
The purpose of this report is to help a financial special assistant, Linda, to analyze the financial position of Atlas Metals Company and deciding its capital budgeting and capital structure. Firstly, I explain why firm should use Net Present Value (NPV) methods for capital budgeting rather than Return on Investment (ROI) method and Payback Period method. Secondly, I calculate the Weighted Average Cost of Capital (WACC) which will be used as discount rate while calculating NPV. Then, I decide which rapid prototyping system company should invest as well as I compare the each expansion projects’ IRR with WACC to decide which projects should be invested and which should not. After deciding
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One of them is CAPM. However, Linda wants to calculate the cost of common equity by growth rate. In order to calculate, we need to know growth rate of dividend, last year dividend amount and stock price. At the very beginning, I calculate the dividend amounts for last 10 years by multiplying Earning per Share by dividend payout ratio (0.3). Then, I find out the average of the growth rate for last 10 years to use that rate as company’s growth rate (Table 1). The reason for finding adjusted dividend is that it is not possible for company to have negative dividend. It is expected the company’s growth rate would be 125 percent of that experienced from 1988 to 1998. So, I found growth rate as 7.799%. So,
Cost of common equity: D1 /P0 + g => ($1.75/24.84)+ 0.07799 : 14.83%
Moreover, the company has 8.5 million shares outstanding and the current market price is $24.84 per share. So;
Market Value of Common Stock: $211,140,000
EARNINGS PER SHARE OF COMMON STOCK
DIVIDEND
adjusted DIVIDEND
GROWTH
$ 5.82 $ 1.75 $ 1.75 $ -0.76 $ 3.31 $ 0.99 $ 0.99 $ -0.07 $ 3.09 $ 0.93 $ 0.93 $ -0.23 $ 2.51 $ 0.75 $ 0.75