Travellers Inn (Millions of Dollars) $ 10 Cash Accounts payable $ 10 Accounts receivable 20 Accruals 15 Inventories 20 Short-term debt Current assets $ 50 Current liabilities $ 25 Net fixed assets Long-term debt Preferred stock (50,000 shares) 50 30 Common equity Common stock (3,800,000 shares $ 10 Retained earnings 30 Total common equity $ 40 Total assets $100 Total liabilities and equity $100
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
The following table gives the current
The following facts also apply to TII.
(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 yield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yield to maturity.
(2) TII’s perpetual
(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
(4) The stock has a beta of 1.6%. The T-bond rate is 6%, and RPM is estimated to be 5%.
(5) TII’s financial vice president recently polled some pension fund investment managers who hold TII’s securities regarding what minimum
(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 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. Based on your analysis, answer the following questions.
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. When you calculate the market values of debt and preferred stock, be sure to round the market price per bond and the market price per share of preferred to the nearest penny.)
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
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-plusjudgmental- risk-premium approach?
g. Use the required return on stock from the CAPM model, and calculate the WACC.
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