16. 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 selling for $68 per share, and the expected dividend at the end of the current year is 50% of the 2003 EPS. Because investors expected past trends to continue, g may be based on the earnings growth rate.
Year EPS Year EPS
1993 $3.99 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 of new debt is 11 percent. The firm’s marginal tax rate is 40 percent. Its capital structure, consider to be optimal, is as follows:
Debt $156,000,000
Common equity 104,000,000
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 ks.
b. Find Foust’s WACC.