You are working as a consultant for Green Team, Inc. (GT), an energy and construction company based in San Diego. GT was founded 10 years ago by Bill Rettman and Isabel Flores. Rettman and Flores met 21 years ago when both worked as engineering managers for San Diego Gas & Electric. GT provides energy efficient heating, ventilation and air conditioning (HVAC) solutions and other energy saving technology to a variety of corporate customers. Recently, GT has been exploring opportunities to expand its offerings to include large-scale systems for convention centers, government facilities and transit hubs. The company wants to bring in new investors to help fund their expansion. Bill and Isabel are wondering how to price additional shares. A key component of their analysis is an estimate of the required return for GT shareholders. Bill and Isabel want to use a publicly traded company as a benchmark and they have selected Trane Technologies plc (ticker TT) as one that closely reflects GTs business. 1 Your consulting assignment is to investigate the weighted average cost of capital for TT as well as examining certain other public companies as described below, and report back to Rettman and Flores.

Calculate the required return on TT using the dividend growth model. Assume that analysts are projecting a current year growth rate = 6.5% for TT. Given this growth rate, what is your estimate of the required return on TT common stock with the dividend growth model? What do you observe about the relative contribution to the total return from the dividend yield as opposed to the capital gains yield?