WACC The following table gives Foust Company\'s earnings per share for the last
ID: 2723814 • Letter: W
Question
WACC
The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 6.5 million shares outstanding, is now (1/1/15) selling for $50 per share. The expected dividend at the end of the current year (12/31/15) is 40% of the 2014 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 11%; Foust's marginal tax rate is 40%; and its target capital structure is 55% debt and 45% equity.
Calculate Foust's after-tax cost of debt. Round your answer to two decimal places.
%
Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/P0 + g. Round your answer to two decimal places.
%
Find Foust's WACC. Round your answer to two decimal places.
%
Explanation / Answer
From the history , the average growth rate in dividend is 8% So assuming g=8% Current Price =P0=50 Expected dividend D1=40%*7.8=3.12 Assume the cost of equity =k So , 50=3.12/(k-0.08) 50k-4=3.12 k=14.24% So Cost of Equity =14.24% No of Common stock outstanding 6,500,000 Market value of common stock =6500000*50= 325,000,000 Debt : Equity =55:45 Debt = Equity*1.222222= 397,222,222 Current interest rate of debt =11% Tax rate =40% Post Tax cost of debt =11%*(1-0.40)= 6.60% WACC Calculation Capital Type Market Value % weight value Post Tax cost Weighted cost Equity 325,000,000 45.0% 14.24% 6.41% Debt 397,222,222 55.0% 6.60% 3.63% 722,222,222 10.04% So WACC is 10.04%
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