The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 7.1 million shares outstanding, is now (1/1/22) selling for $56.00 per share. The expected dividend at the end of the current year (12/31/22) is 45% of the 2021 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.) Year EPS Year EPS 2012 $3.90 2017 $5.73 2013 4.21 2018 6.19 2014 4.55 2019 6.68 2015 4.91 2020 7.22 2016 5.31 2021 7.80 The current interest rate on new debt is 11%; Foust's marginal tax rate is 25%; and its target capital structure is 50% debt and 50% equity. a. Calculate Foust's after-tax cost of debt. Round your answer to two decimal places. 14.55 Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/Po + g. Do not round intermediate calculations. Round your answer to two decimal places. 10.89 % b. Find Foust's WACC. Do not round intermediate calculations. Round your answer to two decimal places. 14.55
The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 7.1 million shares outstanding, is now (1/1/22) selling for $56.00 per share. The expected dividend at the end of the current year (12/31/22) is 45% of the 2021 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.) Year EPS Year EPS 2012 $3.90 2017 $5.73 2013 4.21 2018 6.19 2014 4.55 2019 6.68 2015 4.91 2020 7.22 2016 5.31 2021 7.80 The current interest rate on new debt is 11%; Foust's marginal tax rate is 25%; and its target capital structure is 50% debt and 50% equity. a. Calculate Foust's after-tax cost of debt. Round your answer to two decimal places. 14.55 Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/Po + g. Do not round intermediate calculations. Round your answer to two decimal places. 10.89 % b. Find Foust's WACC. Do not round intermediate calculations. Round your answer to two decimal places. 14.55
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The following table gives Foust Company's earnings per share for the last 10 years. The common stock, 7.1 million shares
outstanding, is now (1/1/22) selling for $56.00 per share. The expected dividend at the end of the current year (12/31/22)
is 45% of the 2021 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.)
Year
EPS
Year
EPS
2012
$3.90
2017
$5.73
2013
4.21
2018
6.19
2014
4.55
2019
6.68
2015
4.91
2020
7.22
2016
5.31
2021
7.80
The current interest rate on new debt is 11%; Foust's marginal tax rate is 25%; and its target capital structure is 50%
debt and 50% equity.
a. Calculate Foust's after-tax cost of debt. Round your answer to two decimal places.
14.55
%
Calculate Foust's cost of common equity. Calculate the cost of equity as rs = D1/Po + g. Do not round intermediate
calculations. Round your answer to two decimal places.
10.89
b. Find Foust's WACC. Do not round intermediate calculations. Round your answer to two decimal places.
14.55
Expert Solution
Introduction
Weighted Average Cost of Capital (WACC) efficiently depicts the position of firm and evaluates the proposed changes in the firm's capital and hence, has become a decisive benchmark for all the investors. It is the average rate at which the company is willing to pay to its investors. In other words, we can say that it is an average rate of return expected by all the investors of capital taking the weight of each element of capital to total capital.
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