WACC The following table gives Foust Company\'s earnings per share for the last
ID: 2724505 • Letter: W
Question
WACC The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 8.8 million shares outstanding, is now (1/1/15) selling for $53 per share. The expected dividend at the end of the current year (12/31/15) is 50% 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 40% debt and 60% equity.
a. Calculate Foust's after-tax cost of debt. Round your answer to two decimal places.
b. Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/P0 + g. Round your answer to two decimal places.
c. Find Foust's WACC. Round your answer to two decimal place
Year 2010 $5.73 2011 2012 2013 2014 EPS EPS Year 2005 $3.90 2006 2007 2008 2009 4.21 4.55 4.91 5.31 6.19 6.68 7.22 7.80Explanation / Answer
Cost of Debt= Cd(1-t)
=0.11(1-0.4)
=6.60%
Cost of Equity= D1/P0+g
D1 = 7.80*50%
=3.40
Po = 53
Growth rate is 8% from EPS data
Cost of Equity= 3.40/53+0.08
=14.42%
WACC= 0.60(0.1442)+0.40(0.066)
=0.0865+0.0264
=11.29%
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