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.)

Year Year EPS EPS $5.73 1996 $3.90 4.21 4.55 4.91 5.31 2001 1997 2002 2003 2004 2005 6.19 6.68 1998 1999 7.22 2000 7.80

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 r_s =D₁/P₀ + g.

b. Find Foust’s WACC.

Cost Of Debt
The 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...