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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