WACC The following table gives Foust Company\'s earnings per share for the last
ID: 2724520 • Letter: W
Question
WACC The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 8.8 million shares outstanding, is now (1/1/15) selling for $53 per share. The expected dividend at the end of the current year (12/31/15) is 50% 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 11%; Foust's marginal tax rate is 40%; and its target capital structure is 40% debt and 60% equity.
a. Calculate Foust's after-tax cost of debt. Round your answer to two decimal places.
b. Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/P0 + g. Round your answer to two decimal places. (I keep getting 14.68 but that is wrong)
c. Find Foust's WACC. Round your answer to two decimal place (I keep getting 11.29 but that is wrong)
Year 2010 $5.73 2011 2012 2013 2014 EPS EPS Year 2005 $3.90 2006 2007 2008 2009 4.21 4.55 4.91 5.31 6.19 6.68 7.22 7.80Explanation / Answer
EPS in 2005 = 3.9 EPS in 2014 = 7.8 Calculation of Growth in EPS 7.8 = 3.9 * (1+g)^9 or, (1+g)^9 = 2 or, 1+g = 1.08006 or, g = 0.08006 Growth Rate =8.006% Cost of Equity = D1/P0 + g = (7.8 *50%) / 53 + 8.006% = 7.358% + 8.006% = 15.36% Post Tax Cost of Debt = 11% * (1 - 0.4) = 6.6% WACC = Kd*Wd + Ke*We where, Wd and We are weights of debt and equity WACC = 6.6% * 40% + 15.36% * 60% = 2.64% + 9.22% = 11.86% a - 6.6% b - 15.36% c - 11.28%
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