Textbook Problem

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 (1/1/17) selling for $65.00 per share. The expected dividend at the end of the current year (12/31/17) is 55% of the 2016 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.)

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.

1. a. Calculate Foust’s after-tax cost of debt and common equity. Calculate the cost of equity as r_s = D₁/P₀ + g.
2. b. Find Foust's WACC.