Posted by **HELP** on Saturday, September 8, 2007 at 9:07pm.

The following tabulation gives earnings per share figures for the Foust Company during the

preceding 10 years. The firm’s common stock, 7.8 million shares outstanding, is now (1/1/03)

selling for $65 per share, and the expected dividend at the end of the current year (2003) is

55 percent of the 2002 EPS. Because investors expect past trends to continue, g may be based

on the earnings growth rate. (Note that 9 years of growth are reflected in the data.)

YEAR EPS YEAR EPS

1993 $3.90 1998 $5.73

1994 4.21 1999 6.19

1995 4.55 2000 6.68

1996 4.91 2001 7.22

1997 5.31 2002 7.80

The current interest rate on new debt is 9 percent. The firm’s marginal tax rate is 40 percent.

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 new debt and common equity. Calculate the cost of equity

as ks D1/P0 g.

b. Find Foust’s weighted average cost of capital. 9(1-0.40)x104/260 + 37x156/260==24.36%

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