Purchase Solution

Weighted Average Cost of Capital (WACC)

Not what you're looking for?

Ask Custom Question

The following tabulation gives earnings per share figures for the Foust Company during the preceding 10 years. The firms' 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 pas trends to continue, g may be based on the earnings growth rate (Noted 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

1. Calculate Foust's after-tax cost of new debt and common equity. Calculate the cost of equity as Ks = D1/P0 + g.
2. Find Foust's weighted average cost of capital

I've figured out the after-tax cost of debt
9%(1.0 -.40)
9%(.60)
answer= 5%

Purchase this Solution
Solution Summary

The solution explains how to calculate the Weighted Average Cost of Capital (WACC)

Solution Preview

a. The cost of equity is to be calculated as Ks=D1/P0+g where D1 is the expected dividend, P0 is the market price and g is the growth rate.
First find g the earnings growth rate. g is the compound annual growth rate in EPS. The EPS has grown from 3.90 to 7.80 in 9 years ( from 1993 to ...

Purchase this Solution
Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

View More Free Quizzes
Related BrainMass Solutions

  • WACC

    133650 WACC: Weighted Average Cost of Capital Determine the weighted average cost of capital (WACC) for the XYZ Company that will finance its optimal capital budget with $120 million of long-term debt (kd = 12.5%) and 180 million in retained earnings

  • Calculate the Weighted-Average Cost of Capital (WACC)

    Calculate GII weighted average cost of capital (WACC). GII's weighted-average cost of capital will be computed as follows: 1.

  • Weighted Average Cost of Capital: Capital Investment Program

    320144 Weighted Average Cost of Capital: Capital Investment Program What is the Weighted Average Cost of Capital? How it is used in a capital investment program to select investments? What is the Weighted Average Cost of Capital?

  • Divisional Cost of Capital Approach vs Weighted Average Cost of Capital

    268840 Divisional Cost of Capital Approach vs Weighted Average Cost of Capital Please explain how to calculate the weighted average cost of capital and how it compares to divisional cost of capital approach. Thank you. Currently, Red Sun, Inc.'

  • Weighted Average Cost of Capital.

    To determine cost of capital, an important concept is weighted average cost of capital. Define Weighted Average Cost of Capital (WACC). How WACC is calculated ? Take an example of a large and popular public company and calculate its WACC.

  • What's the weighted average cost of capital (WACC) for the c

    357684 What's the weighted average cost of capital (WACC) The all equity cost of capital for a company is 15%, and the company has set a target debt to value ratio of 50%.

  • Weighted Average Cost of Capital

    182249 Weighted Average of Cost of Capital Is it important to know your company's WACC? Why or why not? How might management decisions impact the WACC? To what extent is your company's WACC uncontrollable?

  • Capital Structure in a Perfect Market

    Suppose Rumolt's equity cost of capital is 10%, and its debt cost of capital is 5%. a. What is Mike's pretax weighted average cost of capital? Pretax weighted average cost of capital = b.

  • Weighted Average Cost of Capital

    164445 A Company's Weighted Average Cost of Capital In a company with the following known information what is the Weighted Average Calculation of Capital (WACC): After tax cost of debt 6%, cost of preferred stock including flotation cost is 10%, cost

  • WACC

    200259 WACC What is meant by Weighted Average Cost of Capital (WACC)? What is the impact on WACC when an organization needs to raise long term capital? What is meant by Weighted Average Cost of Capital (WACC)?

View More Related Solutions