1. (15 points) The following table gives the current balance sheet for Hansons Inn.

Hansons Inn (Millions of Dollars)
Cash	$10	Accounts Payable	$10
Accounts Receivable	20	Accruals	15
Inventories	20	Short-term Debt	0
Current Assets	$50	Current Liabilities	$25
Net Fixed Assets	50	Long-term Debt	30
		Preferred Stock (50,000 shares)	5
		Common Equity
		Common Stock (3,800,000 shares)	$10
		Retained Earnings	30
		Total Common Equity	$40
Total Assets	$100	Total Liabilities and Equity	$100

The following also apply to Hansons Inn.

1. The long-term debt consists of 29,412 bonds, each having a 20-year maturity, semi-annual payments, a coupon rate of 7.6%, and a face value of $1,000. Current price is $880.
2. Hansons perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $2, and sell for $80 per share.
3. The company has 3.8 million shares of common stock outstanding, a price per share of $20, last dividend per share of $1, and earnings per share of $5. ROE is expected to be 10%
4. The stock has a beta of 1.6. The T=Bond rate is 4% and the market risk premium is assumed to be 5%.
5. Hansons vice president recently polled some pension fund investment managers who hold Hanson securities regarding what minimum rate of return on Hansons common stock would make them willing to hold the common stock rather than the bonds. The responses suggest a risk premium over bonds of 3%.
6. Hansons tax rate is in the 25% bracket.

Assume that you were recently hired by Hansons as a financial analyst and that your boss, the treasurer, has asked you to estimate the companys WACC under the assumption that no new equity will be issued. Your cost of capital should be appropriate for use in EVALUTING PROJECTS THAT ARE IN THE SAME RISK CLASS AS THE ASSETS Hansons not operates. Based on your analysis, answer the following questions.

1. What are the current market value weights for debt, preferred stock and common stock?
2. What is the after-tax cost of debt?
3. What is the cost of preferred stock?
4. What is the required return on common stock using CAPM?
5. Use retention growth equation (sustainable growth rate) to estimate the expected growth rate. Then use this g and the dividend growth model to estimate the required return on common stock.
6. What is the required return on common stock using the bond yield plus premium approach?
7. Calculate the WACC.