A summary of the balance sheet of Travellers Inn Inc (TII), a company that was formed by merging a number of regional model chains and that hopes to rival Holiday Inn on the national scene, is shown in the table: Items Amount (mill INR) Items Amount (mill INR) Cash 10 Account payable 10 Account receivables 20 Accruals 10 Inventories 20 Short-term debt 5 Current assets 50 Current liabilities 25 Net fixed assets 50 Long term debt 30 Preferred stock 5 Common stock 10 Retained earning 30 Total common equity 40 Total Assets 100 Total liabilities and equity 100 There are other facts related to TII: 1) Short-term debt consists of bank loans that currently cost 10%, with interest payable quarterly. These loans are used to finance receivables and inventories on a seasonal basis, so in the off-season, bank loans are zero. 2) The long-term debt consists of 20-year payment mortgage bonds with a coupon rate of 8%, payable half yearly. Currently, the bonds provide a yield to investors of 12%. If new bonds were sold, they would yield investors 12%. (Assume face value of each bond is Rs.100). [Hint: Market price of bond is Rs.69.9]. 3) TIIs perpetual preferred stock has Rs.100 par value, pays quarterly dividend of Rs.2 and has a yield to the investors 11%. New perpetual preferred would have to provide the yield to investors, and the company would incur a 5% flotation cost to sell it. 4) The company has 4 million shares of common stock outstanding at price Rs.20 but the stock has recently traded in the range of Rs.17 to Rs.23. D0=Rs.1 and EPS0=Rs.2. ROE based on average equity was 24% in 2006, but management expects to increase this return to equity to 30%: however, security analysis are not aware of managements optimism in this regard. 5) Betas, as reported by security analysts, range from 1.3 to 1.7; the T-bond rate is 10%; RPM is estimated by various brokerage houses to be in the range of 4.5 to 5.5%. Brokerage house reports forecast growth rates in the range of 10-15% over the foreseeable future. However, some analysts do not explicate forecast growth rates, but they indicate to their clients that they expect TIIs historical trends, as shown in the table in fact (9), to continue. 6) At a recent conference, TIIs financial vice president polled some pension fund investment managers on the minimum rate of return they would have to expect on TIIs common to make them willing to buy the common rather than TII bonds, when the bonds yielded 12%. The responses suggested a risk minimum over TII bonds of 4-6% points. 7) TII us in the 40% federal-plus-state tax bracket. 8) TIIs principal investment banker, Morgan Stanley, predicts a decline in interest rates with a fall to 10% and T-bond rate to 8%, although Morgan Stanley acknowledges that an increase in the expected inflation rate could lead to an increase rather than a decrease in rates. 9) Here is the historical record of EPS and DPS: Year EPS (Rs.) DPS(Rs.) YEAR EPS(Rs.) DPS(Rs.) 1992 0.09 0.00 2000 0.78 0.00 1993 -0.2 0.00 2001 0.80 0.00 1994 0.4 0.00 2002 1.20 0.20 1995 0.52 0.00 2003 0.95 0.40 1996 0.10 0.00 2004 1.30 0.60 1997 0.57 0.00 2005 1.60 0.80 1998 0.61 0.00 2006 2.00 1.00 1999 0.7 0.00 Assume that you are a recently hired financial analysts, and your boss, the treasurer, has asked you to estimate the companys WACC; assume no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects which are in the same risk class as the firms average assets now on the books.