April 18, 2014

Homework Help: fin

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 firmís 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.)
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 firmís 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 Foustís after-tax cost of new debt and common equity. Calculate the cost of equity
as ks D1/P0 g.

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

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