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# Cost of debt, common equity and WACC

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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

b. Find Foust's weighted average cost of capital.

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#### Solution Preview

Please see the attached file for complete solution. Thanks

First calculate the growth rate from past data

Year EPS Growth ...

#### Solution Summary

This solution shows how to calculate the cost of debt and cost of common equity for a firm. Then it helps students to calculate the weighted average cost of capital given the capital structure of the company. The solution uses excel sheet to solve the problem so that formulas used and calculations are easy to understand.

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