WACC The following table gives Foust Company\'s earnings per share for the last
ID: 2724285 • Letter: W
Question
WACC The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 6.3 million shares outstanding, is now (1/1/15) selling for $76 per share. The expected dividend at the end of the current year (12/31/15) is 65% of the 2014 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.)
The current interest rate on new debt is 12%; Foust's marginal tax rate is 40%; and its target capital structure is 50% debt and 50% equity.
Calculate Foust's after-tax cost of debt. Round your answer to two decimal places.
Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/P0 + g. Round your answer to two decimal places.
Find Foust's WACC. Round your answer to two decimal places.
Year EPS Year EPS 2005 $3.90 2010 $5.73 2006 4.21 2011 6.19 2007 4.55 2012 6.68 2008 4.91 2013 7.22 2009 5.31 2014 7.8Explanation / Answer
1
Calculation of Foust's after-tax cost of debt:
Formula :
After-tax cost of debt = Interest rate * (1-tax)
= 12% * (1-40%) =
7.20%
2
Calculation of Foust's cost of common equity:
Growth rate base on 10 years EPS data :
EPS for 2014 =
7.8
EPS for 2005 =
3.9
Growth rate = (7.8 / 3.9)^(1/10) -1 =
7.18%
Cost of Common Equity = (Expected Dividend / Current Stock Price)+ growth rate
Expected dividend = 65% of the 2014 EPS = 7.8*65% =
$ 5.07
Cost of Common Equity = (5.07/76) +7.18% =
13.85%
3
Calculation of WACC:
Formula:
WACC = (Cost of Equity * weight of equity ) + (Cost of Debt * weight of debt)
= (13.85% *50%) + (7.18% *50%)
10.52%
1
Calculation of Foust's after-tax cost of debt:
Formula :
After-tax cost of debt = Interest rate * (1-tax)
= 12% * (1-40%) =
7.20%
2
Calculation of Foust's cost of common equity:
Growth rate base on 10 years EPS data :
EPS for 2014 =
7.8
EPS for 2005 =
3.9
Growth rate = (7.8 / 3.9)^(1/10) -1 =
7.18%
Cost of Common Equity = (Expected Dividend / Current Stock Price)+ growth rate
Expected dividend = 65% of the 2014 EPS = 7.8*65% =
$ 5.07
Cost of Common Equity = (5.07/76) +7.18% =
13.85%
3
Calculation of WACC:
Formula:
WACC = (Cost of Equity * weight of equity ) + (Cost of Debt * weight of debt)
= (13.85% *50%) + (7.18% *50%)
10.52%
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