WACC The following table gives Foust Company’s earnings per share for the last 10 years.

The common stock, 7 8 million shares outstanding, is now (1/1/15) selling for $65 00 per share. The expected dividend at the end of the current year (12/31/15) is 55% 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.)

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 7.80 The current interest rate on new debt is 9%; 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 and common equity. Calculate the cost of equity as rs D1 P0 g.

b. Find Foust’s WACC.

AppendixLO1