17. Problem 11-17 (WACC Estimation) WACC Estimation The following toble gives the bulance sheet for Travellecs Ion Inc. (TII), a company that was formed by marging a number of regional motel chains The followiog facts also opply to 711 : bonds provide investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11,8% yield to maturity. have to provide the same hild to imvestors, and the company would incur a 3.45% fotation cost to sell it. refurt on ecuity (Rot) is expected to be 127 . 4. The stock has a beta of 1.6 . The T-bond rate is 6W, and RPs is estimpted to be 5%. 6. III is in the 25% federal-plus-state tax bracket. Assume that you were recently hired by TII as a financial analyst and that your boss, the treasurer, has asked you to estimate the company/s WACC under the assumption that no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects that are in the same risk class as the asseta Til now operates. Based on your analysis, answer the following questions, Do not round intermediate calculations. Round your answers to two decienal places. A. What are the coment market value welghts for debt, preferred stock, and cominan stock? (Hint: Do your work in delfars, not millions of dollars.) b. What is the atter-tax cost of debt? [e what ir the coir of preterred illock? d. What is the required return on common stock using CAPM? - Whe the retention growth equation to estimale the expected growth rate. Then use the expected grawth rate and the dividend grometh model to estimate the required return an cammen liock t. What is the required retum on common stock using the own-bond-yield-plus-fudgmental-risk-premium approach? a. Use the nepuired retiam on stock from the CAPM model, snd colculnte the whCC. The following facts also acpiy to TII: 1. The long-term debt conshts of 29,412 bonds, each having a 25-year moturity, semiannal poyments, a coupon rate of 7.4\%, and a face value of $1,000. Currenty, theie bonds provide investors with o vield to maturivy of 11.8%, if new bonds were sold, they would have an 11.8% yinld to maturitir. hove to provide the same vield to investors, and the compary would theur a 3.45% hotation cost to seli it: return on equity (AOE) is expected to be 12%. 4. The stock has a beta of 1.6 . The T-bond rate is 6%, and R.P. is estimated to be 5%. 5. TIIs financial vice president recently polled some pension fund investment managers who hoid TIIs securities regarding what minimum rate of return an tiIrs commen percentage points: 6. TII is in the 254 federal-plus-state tax bracket. Assume that you were recently hired by 71as a financigt analyst and that your boss, the treasurer, has asked you to estimate the companrs WACC under the assumption that no new equity will be lissued. Your cost of capital should be appropriate for use in evalvating projects that are in the same risk class as the assets Til now operates. Based on your analysis, answer the following questions. Do not round intermediate calculations. Round your answers to two declmal paces. a. What are the current market value weights for debt, preferred stock, and common stock? (Hant: Do your work in doilar, not millions of dollars) b. What is the after-tax cost of debt? ic What is the cost of preferred stock? d. What is the required return an common stock using capM? e. Use the retention growth equation to eitimase the espected growth rate. Thjon use the expected growth rote and the dividend growth model to estimate the required ratum on cammon stock. f. What is the required return on common stock using the own-bend-yieid-plus-fudgmental-risk-premium approach? 17. Problem 11-17 (WACC Estimation) WACC Estimation The following toble gives the bulance sheet for Travellecs Ion Inc. (TII), a company that was formed by marging a number of regional motel chains The followiog facts also opply to 711 : bonds provide investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11,8% yield to maturity. have to provide the same hild to imvestors, and the company would incur a 3.45% fotation cost to sell it. refurt on ecuity (Rot) is expected to be 127 . 4. The stock has a beta of 1.6 . The T-bond rate is 6W, and RPs is estimpted to be 5%. 6. III is in the 25% federal-plus-state tax bracket. Assume that you were recently hired by TII as a financial analyst and that your boss, the treasurer, has asked you to estimate the company/s WACC under the assumption that no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects that are in the same risk class as the asseta Til now operates. Based on your analysis, answer the following questions, Do not round intermediate calculations. Round your answers to two decienal places. A. What are the coment market value welghts for debt, preferred stock, and cominan stock? (Hint: Do your work in delfars, not millions of dollars.) b. What is the atter-tax cost of debt? [e what ir the coir of preterred illock? d. What is the required return on common stock using CAPM? - Whe the retention growth equation to estimale the expected growth rate. Then use the expected grawth rate and the dividend grometh model to estimate the required return an cammen liock t. What is the required retum on common stock using the own-bond-yield-plus-fudgmental-risk-premium approach? a. Use the nepuired retiam on stock from the CAPM model, snd colculnte the whCC. The following facts also acpiy to TII: 1. The long-term debt conshts of 29,412 bonds, each having a 25-year moturity, semiannal poyments, a coupon rate of 7.4\%, and a face value of $1,000. Currenty, theie bonds provide investors with o vield to maturivy of 11.8%, if new bonds were sold, they would have an 11.8% yinld to maturitir. hove to provide the same vield to investors, and the compary would theur a 3.45% hotation cost to seli it: return on equity (AOE) is expected to be 12%. 4. The stock has a beta of 1.6 . The T-bond rate is 6%, and R.P. is estimated to be 5%. 5. TIIs financial vice president recently polled some pension fund investment managers who hoid TIIs securities regarding what minimum rate of return an tiIrs commen percentage points: 6. TII is in the 254 federal-plus-state tax bracket. Assume that you were recently hired by 71as a financigt analyst and that your boss, the treasurer, has asked you to estimate the companrs WACC under the assumption that no new equity will be lissued. Your cost of capital should be appropriate for use in evalvating projects that are in the same risk class as the assets Til now operates. Based on your analysis, answer the following questions. Do not round intermediate calculations. Round your answers to two declmal paces. a. What are the current market value weights for debt, preferred stock, and common stock? (Hant: Do your work in doilar, not millions of dollars) b. What is the after-tax cost of debt? ic What is the cost of preferred stock? d. What is the required return an common stock using capM? e. Use the retention growth equation to eitimase the espected growth rate. Thjon use the expected growth rote and the dividend growth model to estimate the required ratum on cammon stock. f. What is the required return on common stock using the own-bend-yieid-plus-fudgmental-risk-premium approach