The following table gives Foust Company?s earnings per share for the last 10 years. The common stock,

Question:

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 (1/1/09) selling for $65.00 per share. The expected dividend at the end of the current year (12/31/09) is 55% of the 2008 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate.?

The current interest rate on new debt is 9%; Foust?s marginal tax rate is 40%; and its capital structure, considered to be optimal, is as follows:

Debt ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?$104,000,000

Common equity ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 156,000,000

Total liabilities and equity ? ? ? ? ? ? ? ? ? $260,000,000

a. Calculate Foust?s after-tax cost of debt and common equity. Calculate the cost of equity as r_s = D₁/P₀ + g.

b. Find Foust?s WACC.

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...