The following table gives Foust Company\'s earnings per share for the last 10 ye
ID: 2724319 • Letter: T
Question
The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 7.7 million shares outstanding, is now (1/1/15) selling for $78 per share. The expected dividend at the end of the current year (12/31/15) is 60% 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.)
a. Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/P0 + g. Round your answer to two decimal places
b. Find Foust's WACC. Round your answer to two decimal places
EPS EPS Year 2005 $3.90 2006 2007 2008 2009 4.21 4.55 4.91 5.31 Year 2010 $5.73 2011 2012 2013 2014 6.19 6.68 7.22 7.80Explanation / Answer
D1 = Expected dividend = 7.80*0.60
= 4.68
Note: D1 is including growth
Growth rate (g) table:
Years
Growth rate = [EPS1-EPS0/EPS0]*100
2006
[4.21-3.90/3.90]*100 =0.08
2007
[4.55-4.21/4.21]*100 = 0.08
2008
[4.91-4.55/4.55]*100 = 0.08
2009
[5.31-4.91/4.91]*100 = 0.08
2010
[5.73-5.31/5.31]*100 = 0.08
2011
[6.19-5.73/5.73]*100 = 0.08
2012
[6.68-6.19/6.19]*100 = 0.08
2013
[7.22-6.68/6.68]*100 = 0.08
2014
[7.80-7.22/7.22]*100 = 0.08
So.the Growth rate of the company is 8%.
Cost of equity = [D1/P0]+g
= [4.68/78]+0.08
= 0.06+0.08
= 0.14
= 14%
WACC = (We*Ke)+ (Wd*Kd)
= (1*0.14)+(0*0)
= 0.14
= 14%
Years
Growth rate = [EPS1-EPS0/EPS0]*100
2006
[4.21-3.90/3.90]*100 =0.08
2007
[4.55-4.21/4.21]*100 = 0.08
2008
[4.91-4.55/4.55]*100 = 0.08
2009
[5.31-4.91/4.91]*100 = 0.08
2010
[5.73-5.31/5.31]*100 = 0.08
2011
[6.19-5.73/5.73]*100 = 0.08
2012
[6.68-6.19/6.19]*100 = 0.08
2013
[7.22-6.68/6.68]*100 = 0.08
2014
[7.80-7.22/7.22]*100 = 0.08
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