Titan Mining Corporation has 9.0 million shares of common stock outstanding, 340

Question

Titan Mining Corporation has 9.0 million shares of common stock outstanding, 340,000 shares of 6 percent preferred stock outstanding, and 180,000 7.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $38 per share and has a beta of 1.50, the preferred stock currently sells for $88 per share, and the bonds have 20 years to maturity and sell for 119 percent of par. The market risk premium is 7.8 percent, T-bills are yielding 3 percent, and Titan Mining

Explanation / Answer

Step 1:

1) Cost of Common Stock = Rf + (Rm-Rf)*Beta

Cost of Common Stock = 3 + 7.8*1.5

Cost of Common Stock = 14.70%

2) Cost of Preferred Stock = 6/88

Cost of Preferred Stock = 6.82%

3) Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2

Before Tax Cost of Debt = rate(39,40,-1190,1000) * 2

Before Tax Cost of Debt = 6.29 %

After Tax Cost of Debt = 6.29*(1-36%)

After Tax Cost of Debt = 4.03%

Step 2: Market Value Capital Structure

Market Value of Common Stock = 9Milion * 38 = $ 342 Million

Market value of Preferred Stock = 0.34 Miillion * 88 = $ 29.92 Million

Market Value of Bond = 0.18 Million * 1190 = $ 214.20 Million

Total Market Value = 342+29.92+214.20 = $ 586.12 Million

Weight of Common Stock = 342/586.12 = 0.5835

Weight of Preferred Stock =29.92/586.12 = 0.0510

Weight of Debt = 214.20/586.12 = 0.3655

Step3:

WACC = Weight of Common Stock* Cost of Common Stock + Weight of Preferred Stock* Cost of Preferred Stock + Weight of Debt* After Tax cost of Debt

WACC = 0.5835*14.70 + 0.0510*6.82 + 0.3655*4.03

WACC = 10.40%

Step 4 : Answer

Discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project = 10.40%

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