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The following tabulation gives earnings per share figures for the Knerr Company during the preceding 10 years

#### The following tabulation gives earnings per share figures for the Knerr Company during the preceding 10 years

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The following tabulation gives earnings per share figures for the Knerr Company during the preceding 10 years. The firm’s common stock, 7.8 million shares outstanding, is now (1/1/2003) 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

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 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 Knerr’s after-tax cost of new debt and common equity.

Calculate the cost of equity as ks = D1/P0 +g.

b. Find Knerr’s weighted average cost of capital.