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Question: The following tabulation gives earnings per share ...

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

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

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

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

on the earnings growth rate. (Note that 9 years of growth arereflected 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. Thefirm’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 commonequity. Calculate the cost of equity

as ks D1/P0 g.

b. Find Foust’s weighted average cost of capital

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