Problem:
What does calculating the weighted average cost of capital tell you about Foust company's Financial strategy including the level of risk involved in the business?
How could the company use WACC calculations in determining future investments?
Year EPS Growth Rate
1993 3.9 7.95%
1994 4.21 8.08%
1995 4.55 7.91%
1996 4.91 8.15%
1997 5.31 7.91%
1998 5.73 8.03%
1999 6.19 7.92%
2000 6.68 8.08%
2001 7.22 8.03%
2002 7.8 8.02%
Average growth rate 8.01%
Now calculate the cost of Equity:
D1: 4.29
G: 8.01%
PO: 65
Ks: 14.61%
Cost of Debt:
Tax Rate: 40%
Interest Rate: 9%
Kd: 5.40%
B. Weight
Debt: 104,000,000 0.40
Common Equity: 156,000,000 0.60
Total: 260,000,000
WACC=We*Ke+Wd*Kd: 10.92%