The table below gives the balance sheet for Travellers Inn Inc. (TII), a company that was formed


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

Travellers Inn: December 31, 2012 (Millions of Dollars)

The table below gives the balance sheet for Travellers Inn

The following facts also apply to TII.
(1) Short-term debt consists of bank loans that currently cost 10%, with interest payable quarterly. These loans are used to finance receivables and inventories on a seasonal basis, so bank loans are zero in the off-season.
(2) The long-term debt consists of 20-year, semiannual payment mortgage bonds with a coupon rate of 8%. Currently, these bonds provide a yield to investors of rd = 12%. If new bonds were sold, they would have a 12% yield to maturity.
(3) TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend of $2, and has a yield to investors of 11%. New perpetual preferred would have to provide the same yield to investors, and the company would incur a 5% flotation cost to sell it.
(4) The company has 4 million shares of common stock outstanding. P0 = $20, but the stock has recently traded in the price range from $17 to $23. D0 = $1 and EPS0 = $2. ROE based on average equity was 24% in 2012, but management expects to increase this return on equity to 30%; however, security analysts and investors generally are not aware of management's optimism in this regard.
(5) Betas, as reported by security analysts, range from 1.3 to 1.7; the Tbond rate is 10%; and RPM is estimated by various brokerage houses to be in the range from 4.5% to 5.5%. Some brokerage house analysts report forecasted dividend growth rates in the range of 10% to 15% over the foreseeable future.
(6) 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 12%. The responses suggested a risk premium over TII bonds of 4 to 6 percentage points.
(7) TII is in the 40% federal-plus-state tax bracket.
(8) TII's principal investment banker predicts a decline in interest rates, with rd falling to 10% and the T-bond rate to 8%, although the bank acknowledges that an increase in the expected inflation rate could lead to an increase rather than a decrease in interest rates.
Assume that you were recently hired by TII 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 TII now operates.

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Related Book For  answer-question

Intermediate Financial Management

ISBN: 978-1111530266

11th edition

Authors: Eugene F. Brigham, Phillip R. Daves

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