WACC Estimation

The following table gives the balance sheet for Travelers Inn Inc. $($TII$),$ a company that was formed by merging a number of regional motel chains.

The following facts also apply to TII:

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.

the same yield to investors, and the company would incur a $3\mathrm{.}25\%$ flotation cost to sell it$.$

$($ROE$)$ is expected to be $8\%.$

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

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

following questions. Do not round intermediate calculations. Round your answers to two decimal places.

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.$)$

Weight

Debt

$\%$

Preferred stock

$\%$

Common stock

$\%$

b$.$ What is the after$-$tax cost of debt?

$\%$

c$.$ What is the cost of preferred stock?

$\%$

d$.$ What is the required return on common stock using

CAPM?

$\%$

e$.$ Use the retention 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 common stock.

$\%$

f$.$ What is the required return on common stock using the

own$-$bond$-$yield$-$plus$-$judgmental$-$risk$-$premium

approach?

$\%$

g$.$ What is Travelers' WACC? Use the required returns on

stock from part e$.$

$\%$