Ask Experts Questions for FREE Help !
Ask
    Hoshi655's Avatar
    Hoshi655 Posts: 2, Reputation: 1
    New Member
     
    #1

    Sep 30, 2007, 09:19 PM
    Find Foust’s weighted average cost of capital
    I am having extreme problems figuring out the WACC for this problem (part B). Any help would be appreciated. Thank you in advance.

    The following tabulation gives earnings per share figures for the Foust Company during the preceding 10 years. The firm’s common stock, 7.8 million shares outstanding, is now (1/1/03) selling for $65 per share, and the expected dividend at the end of the current year (2003) is 55 percent of the 2002 EPS. Because investors expect past trends to continue, g may be based on the earnings growth rate. (Note that 9 years of growth are reflected in the data.)

    YEAR EPS YEAR EPS
    1993 $3.90 1998 $5.73
    1994 4.21 1999 6.19
    1995 4.55 2000 6.68
    1996 4.91 2001 7.22
    1997 5.31 2002 7.80

    The current interest rate on new debt is 9 percent. The firm’s marginal tax rate is 40 percent. 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 new debt and common equity. Calculate the cost of equity as ks D1/P0 g. I figured this out as $189,500
    b. Find Foust’s weighted average cost of capital.
    bugstaz03's Avatar
    bugstaz03 Posts: 2, Reputation: 1
    New Member
     
    #2

    Nov 4, 2007, 10:24 PM
    Quote Originally Posted by Hoshi655
    I am having extreme problems figuring out the WACC for this problem (part B). Any help would be appreciated. Thank you in advance.

    The following tabulation gives earnings per share figures for the Foust Company during the preceding 10 years. The firm’s common stock, 7.8 million shares outstanding, is now (1/1/03) selling for $65 per share, and the expected dividend at the end of the current year (2003) is 55 percent of the 2002 EPS. Because investors expect past trends to continue, g may be based on the earnings growth rate. (Note that 9 years of growth are reflected in the data.)

    YEAR EPS YEAR EPS
    1993 $3.90 1998 $5.73
    1994 4.21 1999 6.19
    1995 4.55 2000 6.68
    1996 4.91 2001 7.22
    1997 5.31 2002 7.80

    The current interest rate on new debt is 9 percent. The firm’s marginal tax rate is 40 percent. 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 new debt and common equity. Calculate the cost of equity as ks D1/P0 g. I figured this out as $189,500
    b. Find Foust’s weighted average cost of capital.
    How did you come to that conclusion?
    Vanquish's Avatar
    Vanquish Posts: 1, Reputation: 1
    New Member
     
    #3

    Jan 6, 2008, 07:16 PM
    Figured it out how?

Not your question? Ask your question View similar questions

 

Question Tools Search this Question
Search this Question:

Advanced Search

Add your answer here.


Check out some similar questions!

Weighted Average Cost of Capital [ 2 Answers ]

Type of financing Percentage of future financing Bonds (8%,$1,000 par, 16 year maturity) 38% Preferred stock (5,000 shares outstanding, 15% $50 par, $1.50 dividend) Common stock ...

Finance / cost of equity and weighted average cost of capital [ 2 Answers ]

How do I go about calculating the after-tax cost of new debt and common equity. Calculate the cost of equity and calculate weighted cost of capital. I do not understand this a bit. The following tabulation gives earnings per share figures for the Foust Company during the preceding 10 years. The...


View more questions Search