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.)

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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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

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