For g the answer is not 10.87% and also it is not 10.47%.
9 10. 11 12 14 15 17 The following table gives the balance sheet for Travellers Inn Inc. (TAI), a company that was formed by merging a number of regional motel chains Travellers Inn (Millions of Dollars) 0 Cash $ 10 Accounts payable $ 10 Accounts 20 Accruals 15 receivable Inventories 20 Short-term debt 0 O Current assets $50 Current liabilities $ 25 O 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 facts also apply to THL: 1. The long-term debt consists of 29,412 bonds, each having a 25-year maturity, semiannual payments, a coupon rate of 74%, and a face value of $1,000. Currently, these bonds provide Investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% veld to maturity 2. THI's perpetual preferred stock has a 5100 par value, pays a quarterly dividend per share of 84, and has a yield to investors of 8% New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 3.15 Rotation cost to sell 3. The company has 3.8 million shares of common stock outstanding, a price per share. Po $20, dividend per share Do - $1, and earnings per share -Po - $5. The return on equity (DE) is expected to be 4. The stock has a buta of 1.6. The T-bond rates 4%, and RP is estimated to be 5% 5. Tit's financial vice president recently polled some pension fund investment managers who hold TIT'S Securities regarding what minimum rate of return on Thi's common would make them willing to buy the common rather than IT bonds, given that the bonds yielded 11.1%. The responses suggested a risk premium over Til bonds of 2 percentage points 6. This in the 25% federal-plus-state tax bracket 18 . 19 20 AZ Assume that you were recently hired by Tit 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 assets now operates. Based on your analysis, answer the following questions. Do not round intermediate calculations, Round your answers to two decimal places What are the current market value weights for debt, preferred stock, and common stock? (Hint: Do your work in dollars, not millions of doltars.) Weight Debt 18.15 Preferred stock 9.52 Common stock 72.33 b. What is the after-tax cost of debt? 3.85 c. What is the cost of preferred stock? 8.26 d. What is the required return on cock wing CAPM? 12.00 use the retention growth equation to estimate the expected growth rate. Then use the expected growth rate and the dividend growth modela estimate the retired return on common 11.72 What is me required return on common stocking the own-bond-vil-olus-Judgemalio premium approach 13.30 What is Travellers' WACC? Use the required returns on stock from part 10.87 cory
