Titan Mining Corporation has 9.6 million shares of common stock outstanding, 400
ID: 2627102 • Letter: T
Question
Titan Mining Corporation has 9.6 million shares of common stock outstanding, 400,000 shares of 6 percent preferred stock outstanding, and 210,000 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $44 per share and has a beta of 1.30, the preferred stock currently sells for $94 per share, and the bonds have 20 years to maturity and sell for 115 percent of par. The market risk premium is 8.4 percent, T-bills are yielding 4 percent, and Titan Mining
Titan Mining Corporation has 9.6 million shares of common stock outstanding, 400,000 shares of 6 percent preferred stock outstanding, and 210,000 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $44 per share and has a beta of 1.30, the preferred stock currently sells for $94 per share, and the bonds have 20 years to maturity and sell for 115 percent of par. The market risk premium is 8.4 percent, T-bills are yielding 4 percent, and Titan Mining
Explanation / Answer
Solution :- Cost of common stock = Risk free return + Beta * Market risk premium.
= 4 % + 1.30 * 8.4 %
= 4 % + 10.92 %
= 14.92 %
Cost of preferred stock = Dividend per share of preferred stock / Net proceeds per share of preferred stock
= 6 % of 100 / 94
= 6 / 94
= 0.0638 i.e., 6.38 %
Cost of bond = [ Coupon amount + (Face value of bond- Bond price) / Number of Years to maturity ] / (Face value of bond + Bond price) / 2
= [ 1000 * 8.4 % * 6 / 12 + (1000 - 1150) / 20 * 12 / 6 ] / (1000 + 1150) / 2
= [ 42 - 150 / 40 ] / (2150 / 2)
= [ 42 - 3.75 ] / 1075
= 38.25 / 1075
= 0.0356 i.e., 3.56 %
Annual cost of debt = 3.56 * 12 / 6 = 7.12 %
Calculation of weighted average cost of capital (WACC) at the market value weights :-
Conclusion :- Weighted average cost of capital (WACC) at the market value weights = 11.7556 % (Rounded off to 11.76 %)
Source of fund Market value Weight Cost Weight * Cost Common stock 422400000 (9600000 * 44) 0.60 14.92 % 8.9520 % Preferred stock 37600000 (400000 * 94) 0.06 6.38 % 0.3828 % Bond 241500000 (210000 * 1000 * 115 %) 0.34 7.12 % 2.4208 % Total 701500000 1 11.7556 %Related Questions
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