The following table gives Foust Company's earnings per share (EPS) for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/20) selling for $65.00 per share. The expected dividend at the end of the current year (12/31/20) is 55% of the 2019 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

Growth

Year

EPS

Growth

2010

3.9

2015

5.73

7.91

2011

4.20

7.69

2016

6.19

5.03

2012

4.55

8.33

2017

6.68

6.92

2013

4.91

9.91

2018

7.22

9.08

2014

5.31

8.14

2019

7.80

8.03

Foust has 25-year non-callable bonds outstanding with a face value of $1,000, an 12% annual coupon, and a market price of $1,320. Foust can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share.Its capital structure, considered to be optimal, is as follows:

Debt$111,000,000

Preferred Stock$4,000,000

Common equity$155,000,000

Total liabilities and equity$270,000,000

i.If the company was to issue new debt, what would be a reasonable estimate of the interest rate on that debt?

ii.If the company's tax rate is 40%, what is its after-tax cost of debt?

iii.Calculate Foust's cost of common equity by DCF approach?

iv.If the firm's beta is 1.4, the risk-free rate is 7 %, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach?

v.If the firm's bonds earn a return calculated in part (i), based on the bond-yield-plus-riskpremium approach, what will be cost of common equity? Use the midpoint of the risk premium range discussed in the class. vi. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Foust's cost of common equity.

vii.What is the company's cost of preferred stock, r_p?

viii.Find Foust's WACC. (use cost of common equity calculated in part vi)

(b)Bartley Barstools has an equity multiplier of 3.8, and its assets are financed with some combination of long-term debt and common equity. What is its debt to asset ratio?

(c)Doublewide Dealers has a ROA of 12%, a 3% profit margin, and an ROE of 15.5%. What is its total assets turnover? What is its equity multiplier?