CASH	$10	ACCOUNTS PAYABLE	$10
ACCOUNTS RECEIVABLE	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	5.5
		COMMON EQUITY
		COMMON STOCK	10
		RETAINED EARNINGS	30
		TOTAL COMMON EQUITY	$40
TOTAL ASSETS	$100	TOTAL LIABILITIES AND EQUITY	$100

The following facts also apply:

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 bank loans are zero in the off-season.

2. The long-term debt consists of 15-year, semiannual payment mortgage bonds with a coupon rate of 6%. Currently, these bonds provide a yield to investors of rd= 10%. If new bonds were sold, they would have a 10% yield to maturity.

3. Travelors Inn's perpetual preferred stock has $100 par value, pays a semiannually dividend of $3, and has a yield to investors of 12%. New perpetual preferred would have to provide the same yield to investors, and the company would incur a 5% floatation cost to sell it.

4. The company has a 4.5 million shares of common stock outstanding. P₀ = $15, but the stock has recently traded in the price range from $12 to $18. D₀= $1 and EPS₀= $2. ROE based on average equity was 24% in 2014, but management expects to increase this return on equity to 30%; however, security analysts and investors generally are not aware of management's optimism in this regard.

5. Beta, as reported by security analysts, range from 1.2 to 1.6; the T-bond rate is 8%; and RP _m is estimated by various brokerage houses to be in the range from 4% to 5%. Some brokerage house analysts report forecasted dividend growth rates in the range 6% to 10% over the forecastable future.

6. Travelor's Inn's financial vice president recently polled some pension fund investment manager's who hold Travelors Inn's securities regarding what minimum rate of return on Travelor Inn's common would make them willing to buy common rather Travelors Inn's bonds, given that the bond yielded 10%. The responses suggested a risk premium over travelor inn's bonds of 4 to 6 percentage points.

7. Travelor's Inn's is in the 40% federal plus rate tax bracket

8. Travelor's Inn's principal investment banker predicts a decline in interest rates, with R_d= falling to 8% and the T-bond rate to 6%, although the bank acknowledges that an increase in the expected inflation rate could lead to an increases rather than decrase in interestr rates.

Assume that you the owner accepted the responsibility as a financial analyst that you charged 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 assets travelors inn now operates.

Use three ways to determine the cost of equity:

1. CAPM: r_s = r_RF + (r_m -r_RF ) b

2. DCF: r_s= D₁/P₀ + g

3. Own-bond-yield-risk premium: r_s = r_d +bond RP