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Estimate the cost of capital for DayTop Inns

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Question - DayTop Inns is a publicly traded company, with 10 million shares trading at $ 70 a share and $ 300 million in debt (market value as well as book value) outstanding. The firm derives 60% of its value from hotels and the remaining 40% from transportation. The unlevered beta is 0.8 for firms in the hotel business and 1.2 for firms in the transportations business. DayTop is rated A and can borrow money at 5%. The riskfree rate is 4.5% and the market risk premium is 4%; the corporate tax rate is 40%.

a. Estimate the cost of capital for DayTop Inns?

b. DayTop Inns is considering acquiring SwissHotels, another hotel company (which derives 100% of its revenues from hotels) for $ 400 million, three quarters of which it plans to fund by a new debt issue (which will cause its rating to drop and its cost of debt to rise to 5.5%) and a quarter by issuing new stock. Estimate the cost of capital after the acquisition.

Reference no: EM132948107

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