The following table gives Foust Companys earnings per share for the last 10 years. The common stock,
Question:
The following table gives Foust Company’s earnings per share for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/06) selling for $65 per share, and the expected dividend at the end of the current year (12/31/06) is 55 percent of the 2005 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.)
The current interest rate on new debt is 9 percent, Foust’s marginal tax rate is 40 percent, and its capital structure, considered to be optimal, is as follows:
Debt $104,000,000
Common equity 156,000,000
Total liabilities and equity $260,000,000
a. Calculate Foust’s after-tax cost of debt and common equity. Calculate the cost of equity as rs =D1/P0 + g.
b. Find Foust’s WACC.
Cost Of DebtThe cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Step by Step Answer:
Fundamentals of Financial Management
ISBN: 978-0324302691
11th edition
Authors: Eugene F. Brigham, Joel F. Houston