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The following tabulation gives earings per share figures for the Foust Company durining the preceeding 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 ar 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 teh earnings growth rate. ( note that 9 years of growth are reflected in the data).
year EPS
1993 $3.90
1994 4.21
1995 4.55
1996 4.91
1997 5.31
1998 5.73
1999 6.19
2000 6.68
2001 7.22
2002 7,80
The current interest rate on new debt is 9 percent. The firms marginal tax rate is 40 percent. It capital structure, considered to be optimal, is a follows:
Debt $104,000,000 Common equity 156,000,000
Total liabilities and equity 260,000,000

1. Calculate after-tax cost of new debt and common equity. Calculate the cost of equity as ks = D1/P0 + g.

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