# Weighted average cost of capital

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.

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#### Solution Preview

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 ...

#### Solution Summary

This explains the computation of Weighted average cost of capital by taking an example