10 points to whoever can share me correctly the weighted cost of possessions?
Weighted cost of assets? please comfort?
The following tabulation give yield per share data for the Foust Company during the preceding 10 years. The firm’s adjectives stock, 7.8 million shares outstanding, is presently (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 chronological trends to verbs, g may be base on the income growth rate. (Note that 9 years of growth are reflect surrounded by the notes.)
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 contemporary debt is 9 percent. The firm’s marginal toll rate is 40 percent.
Its means structure, considered to be optimal, is as follows:
Debt $104,000,000
Common equity 156,000,000
Total liability and equity $260,000,000
Answers:
To answer this examine you necessitate to find the company's Cost of Debt and its Cost of Equity.
For the Cost of Debt, we assume that adjectives of the company's debt is at 9% as we enjoy no other information to the contrary. To total the cost of debt we stipulation to adjust the 9% to an after-tax number by using the marginal tax rate and the following formula:
Cost of Debt = (before-tax rate x (1-marginal tax))
= 9% x (1-40%)
= 5.4%
For the Cost of Equity, we will use the dividend capitalization model. This is calculated by dividing the dividends for subsequent year by the current bazaar price plus the growth rate of dividends.
2003 dividend is expected to be 55% of 2002 EPS ($7.8), which is equal to $4.29. The current open market price is $65. So dividing the 2003 dividend into the current bazaar price we capture 6.6%. However, we still want to incorporate the dividend growth rate.
For the dividend growth rate, assuming that the 55% plane is consistent, we can simply use the growth rate of EPS. Over the nine year extent of date, EPS have grown at 8.01%.
So the Cost of Equity is simply 6.6% + 8.01% = 14.7%.
To bring back the WACC - you requirement to combine the Cost of Equity and the Cost of Debt taking into consideration the assets structure.
The formula for WACC is:
WACC = Cost of Equity x (Equity/Total Capitalization) + Cost of Debt x (Debt/Total Capitalization)
= 14.7% x (156M/260M) + 5.4% x (104M/260M)
= 8.82% + 2.16%
= 10.98%
So, the WACC for this example is 10.98% base on the assumptions and calculation used.
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The following tabulation give yield per share data for the Foust Company during the preceding 10 years. The firm’s adjectives stock, 7.8 million shares outstanding, is presently (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 chronological trends to verbs, g may be base on the income growth rate. (Note that 9 years of growth are reflect surrounded by the notes.)
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 contemporary debt is 9 percent. The firm’s marginal toll rate is 40 percent.
Its means structure, considered to be optimal, is as follows:
Debt $104,000,000
Common equity 156,000,000
Total liability and equity $260,000,000
Answers:
To answer this examine you necessitate to find the company's Cost of Debt and its Cost of Equity.
For the Cost of Debt, we assume that adjectives of the company's debt is at 9% as we enjoy no other information to the contrary. To total the cost of debt we stipulation to adjust the 9% to an after-tax number by using the marginal tax rate and the following formula:
Cost of Debt = (before-tax rate x (1-marginal tax))
= 9% x (1-40%)
= 5.4%
For the Cost of Equity, we will use the dividend capitalization model. This is calculated by dividing the dividends for subsequent year by the current bazaar price plus the growth rate of dividends.
2003 dividend is expected to be 55% of 2002 EPS ($7.8), which is equal to $4.29. The current open market price is $65. So dividing the 2003 dividend into the current bazaar price we capture 6.6%. However, we still want to incorporate the dividend growth rate.
For the dividend growth rate, assuming that the 55% plane is consistent, we can simply use the growth rate of EPS. Over the nine year extent of date, EPS have grown at 8.01%.
So the Cost of Equity is simply 6.6% + 8.01% = 14.7%.
To bring back the WACC - you requirement to combine the Cost of Equity and the Cost of Debt taking into consideration the assets structure.
The formula for WACC is:
WACC = Cost of Equity x (Equity/Total Capitalization) + Cost of Debt x (Debt/Total Capitalization)
= 14.7% x (156M/260M) + 5.4% x (104M/260M)
= 8.82% + 2.16%
= 10.98%
So, the WACC for this example is 10.98% base on the assumptions and calculation used.