WACC Estimation The following table gives the balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains. The following focts also apply to Tit: 1. The long-term debt consist of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon rate of 7.6%, and a face value of 51,000 Currently, these bonds provide imvestors with o yield to maturity of 11.8%. If new bonds were sold, ther would have an 11.84% yeld to maturity. 2. Tris perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $1, and has a yield to imvestors of aw, New perpetual preferred stock would have to provide the same vieid to investors, and the company would incur a 3.75% flotation cost to seil it 1. The long-term debt consists of 29,412 bonds, each having a 20 -year maturity, semiannual payments, a coupon rate of 7.6%, and a face value of $1,000. Currently, these bonds provide investors with a vield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yleld to maturity. 2. TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $1, and has a yeld to investors of 8%. New perpetual preferred stock would have to provide the same vield to investors, and the company would incur a 3.75% focation cost to sell it: 3. The company has 3.8 million shares of common stock outstanding, a price per share =P0=$20, dividend per share =D0=$1, and earnings per share = EPS0=$5. The return on equity (ROE) is expected to be 12%. 4. The stock has a beta of 1.6 . The T-bond rate is 7%, and PPM is estimated to be 5%. 5. Tris financlal vice president recently polled some pension fund imvestment managers who hold TII's securities regarding what minmum rate of return on TIrs common would make them wiling to buy the common rather than Tit bonds, given that the bonds yielded 11,8%. The responses suggested a risk premium over TII bonds of 2 percentage points. 6. TII 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 treasure, 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 TII now operates. Based on your analysis, answer the foliowing questions. Do not round intermediate calculations. Flound your answers to two decimal Dlaces: a. What are the current market value weights for debt, preferred stock, and common stock? (Hint: Do your work in dollars, not millions of dollars.) b. What is the after-ax cost of debt? c. What is the cost of preferred stock? d. What is the required return on common stock using CAPM? C. Use the retention growth equation to estimate the expected growth rate. Then use the expected groweh rate and the dividend growth model to estimate the reauired retum on common stock. C. What is the required return an comman stock using the own-bond-yield-plus-judgmental-risk-premium approach? 9. What is Travellen' WACC) Use the required returns on stook from part e. b. What is the after-tax cost of debt? \%. c. What is the cost of preferred stock? d. What is the required retum on common stock using CAPM? e. Use the reteytion growth equation to estimate the expected growth rate. Then use the expected growth rate and the dividend growth model to estimate the required return on commen stock. f. What is the required retum on common stock using the own-bend-vield-plus-fudgmental-risk-premium approach? 9. What is Travellen' WACC? Use the required returns on stock from part e. WACC Estimation The following table gives the balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains. The following focts also apply to Tit: 1. The long-term debt consist of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon rate of 7.6%, and a face value of 51,000 Currently, these bonds provide imvestors with o yield to maturity of 11.8%. If new bonds were sold, ther would have an 11.84% yeld to maturity. 2. Tris perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $1, and has a yield to imvestors of aw, New perpetual preferred stock would have to provide the same vieid to investors, and the company would incur a 3.75% flotation cost to seil it 1. The long-term debt consists of 29,412 bonds, each having a 20 -year maturity, semiannual payments, a coupon rate of 7.6%, and a face value of $1,000. Currently, these bonds provide investors with a vield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yleld to maturity. 2. TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $1, and has a yeld to investors of 8%. New perpetual preferred stock would have to provide the same vield to investors, and the company would incur a 3.75% focation cost to sell it: 3. The company has 3.8 million shares of common stock outstanding, a price per share =P0=$20, dividend per share =D0=$1, and earnings per share = EPS0=$5. The return on equity (ROE) is expected to be 12%. 4. The stock has a beta of 1.6 . The T-bond rate is 7%, and PPM is estimated to be 5%. 5. Tris financlal vice president recently polled some pension fund imvestment managers who hold TII's securities regarding what minmum rate of return on TIrs common would make them wiling to buy the common rather than Tit bonds, given that the bonds yielded 11,8%. The responses suggested a risk premium over TII bonds of 2 percentage points. 6. TII 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 treasure, 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 TII now operates. Based on your analysis, answer the foliowing questions. Do not round intermediate calculations. Flound your answers to two decimal Dlaces: a. What are the current market value weights for debt, preferred stock, and common stock? (Hint: Do your work in dollars, not millions of dollars.) b. What is the after-ax cost of debt? c. What is the cost of preferred stock? d. What is the required return on common stock using CAPM? C. Use the retention growth equation to estimate the expected growth rate. Then use the expected groweh rate and the dividend growth model to estimate the reauired retum on common stock. C. What is the required return an comman stock using the own-bond-yield-plus-judgmental-risk-premium approach? 9. What is Travellen' WACC) Use the required returns on stook from part e. b. What is the after-tax cost of debt? \%. c. What is the cost of preferred stock? d. What is the required retum on common stock using CAPM? e. Use the reteytion growth equation to estimate the expected growth rate. Then use the expected growth rate and the dividend growth model to estimate the required return on commen stock. f. What is the required retum on common stock using the own-bend-vield-plus-fudgmental-risk-premium approach? 9. What is Travellen' WACC? Use the required returns on stock from part e
