The following facts also apply to TII:

The long$-$term debt consists of $29,412$ bonds, each having a $25-$year maturity, semiannual payments, a coupon rate of $7\mathrm{.}4\%,$ and a face value of $$1,000.$

Currently, these bonds provide investors with a yield to maturity of $11\mathrm{.}8\%.$ If new bonds were sold, they would have an $11\mathrm{.}8\%$ yield to maturity.

TII's perpetual preferred stock has a $$100$ par value, pays a quarterly dividend per share of $$4,$ and has a yield to investors of $10\%.$ New perpetual preferred

stock would have to provide the same yield to investors, and the company would incur a $3\mathrm{.}05\%$ flotation cost to sell it$.$

The company has $3\mathrm{.}8$ million shares of common stock outstanding, a price per share $=P_0=$$$20,$ dividend per share $=D_0=$$$1,$ and earnings per share $=$

$EP{S}_0=$$$5.$ The return on equity $($ROE$)$ is expected to be $10\%.$

The stock has a beta of $1\mathrm{.}6.$ The T$-$bond rate is $7\%,$ and $R{P}_M$ is estimated to be $5\%.$

TII's financial vice president recently polled some pension fund investment managers who hold TII's securities regarding what minimum rate of return on

TII's common would make them willing to buy the common rather than TII bonds, given that the bonds yielded $11\mathrm{.}8\%.$ The responses suggested a risk

premium over TII bonds of $2$ percentage points.

TII is in the $25\%$ federal$-$plus$-$state tax bracket.