The following table gives Foust Companys 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

1. If the company was to issue new debt, what would be a reasonable estimate of the interest rate on that debt?
2. If the companys tax rate is 40%, what is its after-tax cost of debt?
3. Calculate Fousts cost of common equity by DCF approach?
4. If the firms beta is 1.4, the risk-free rate is 7 %, and the average return on the market is 13%, what will be the firms cost of common equity using the CAPM approach?
5. If the firms 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 Fousts cost of common equity.

7. What is the companys cost of preferred stock, r_p?
8. Find Fousts WACC. (use cost of common equity calculated in part vi)