Beruflich Dokumente
Kultur Dokumente
Problem 17
Travelers Inn Incorporated: Book Values, Market Values, and the Target Capital Structure (Millions of Dollar
Balance Sheets
Assets
Cash $10
Receivables $20
Inventories $20
Total Current Assets $50
1. Short term debt consists of bank loans that currently cost 10% with interest payable quarterly. These loans are u
so bank loans are zero in the off-season.
2. The long term debt consists of 20 year semi-annual payment mortgage bonds with a coupon rate of 8%. Current
If new bond were sold, they would have a 12% yield to maturity.
3. The company's perpetual preferred stock has a $100 par value, pays a quarterly dividend of $2, and has a yield to
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 th
on average equity was 24% in 2008, but management expects to increase this return on equity to 30%; however
optimism in this regard.
5. Betas as reported by security analysts, range from 1.3 to 1.7; the T-bond rate is 10%, and RPm is estimated by v
brokerage house analysts report forecasted dividend growth rates in the range of 10% to 15% over the foreseeab
6. The company's vice president recently polled some pension fund managers who hold the company's securities re
need to be make them willing to buy the common rather than bonds, given that the bonds yielded 12%. The resp
8. The company's principal investment banker predicts a decline in interest rates, with rd falling to 10% and the T-bo
expected inflation rate could lead to an increase rather than a decrease in interest rates.
Estimate the company's WACC under the assumption that no new equity will be issued. Your cost of capital shou
as the assets the company now operates.
I/YR = rd = 3.60%
Annualized rd = 7.20%
N= 40
PV = ($608.84)
PMT = $60
FV = $1,000
I/YR = rd = 10.00%
Annualized rd = 20.00%
A-T rd = 12.00%
Chapter 9. Problem 17
and the Target Capital Structure (Millions of Dollars, December 31, 2009)
Investor-Supplied Ca
Book
Percent Book
Liabilities and Equity of Total Value
0% with interest payable quarterly. These loans are used to finance receivables and inventories on a seasonal basis
nt mortgage bonds with a coupon rate of 8%. Currently, these bonds provide a yield to investors of rd = 12%.
alue, pays a quarterly dividend of $2, and has a yield to investors of 11%. New perpetual preferred would have to provide
5% flotation cost to sell it.
nding, P0 = $20, but the stock has recently traded in the price range from $17 to $23. D0 = $1 and EPS0 = $2. ROE based
ects to increase this return on equity to 30%; however, security analysts and investors generally are not aware of management
7; the T-bond rate is 10%, and RPm is estimated by various brokerage houses to be in the range from 4.5% to 5.5%. Some
h rates in the range of 10% to 15% over the foreseeable future.
n fund managers who hold the company's securities regarding what the minimum rate of return on the company's common stoc
an bonds, given that the bonds yielded 12%. The responses suggested a risk premium over the bonds of 4 to 6 percentage poi
ne in interest rates, with rd falling to 10% and the T-bond rate to 8%, although the bank acknowledges that an increase in the
n a decrease in interest rates.
no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects that are in the same risk c
rps = 8.42%
wd (short) 0.00%
wd (long) 20.00%
Investor-Supplied Capital
Book Market Target
Capital
Percent Market Percent Structure
of Total Value of Total
6.3% $5 4.17%
12.5%
37.5%
50.0% $80 66.67% ws =
tors of rd = 12%.
Beta 1.70
10-year T-bond yield 8.0%
Market risk premium 5.5%
rs = 17.35%
rs 18.00%
rd = Cost of debt
rps = Cost of preferred stock
rs = Cost of stock (comon equity)
T = Tax rate
Required Answers:
wd (short)
wd (long)
wps
ws
rd
rps
rs
k (common equity)
COST OF DEBT, rd
The relevant cost of debt is the after-tax cost of new debt, taking account of the tax deductibility of interest. The after-t
rate (or the before-tax cost of debt) times one minus the tax rate.
The after-tax cost of debt-capital = The Yield-to-Maturity on long-term debt x (1 minus the marginal tax rate
rd = 12%(1-.40)
rd = 7.20%
PROBLEM
New perpetual preferred has a yield to investors of 11%.
Annual dividend on new preferred = 11% ($100) = $11
Par value $100.00
Flotation % 5.0%
rps = 11.6%
r s = R RF b∗ RP M