THANK YOU! Titan Mining Corporation has 9.1 million shares of common stock outst
ID: 2647370 • Letter: T
Question
THANK YOU!
Titan Mining Corporation has 9.1 million shares of common stock outstanding and 350,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $39 per share and has a beta of 1.55, and the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7.9 percent, T-bills are yielding 5 percent. and Titan Mining?s tax rate is 40 percent a. What is the firm?s market value capital structure? (Do not round intermediate calculations and round your final answers to 4 decimal places. (e.g., 32.1616)) b. If Titan Mining is evaluating a new investment project that has the same risk as the firm?s typical project, what rate should the firm use to discount the project?s cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Discount rate %Explanation / Answer
a)
Market Value of Common Stock = 9.1Milion * 39 = $ 354.9 Million
Market Value of Bond = 0.35 Million * 1000*110% = $ 385 Million
Total Market Value = $ 739.90 Million
Weight of Common Stock = 354.90/739.90 = 0.4797
Weight of Debt = 385/739.90 = 0.5203
Answer
Debt = 0.5203
Equity = 0.4797
b)
1) Cost of Common Stock = Rf + (Rm-Rf)*Beta
Cost of Common Stock = 5 + 7.9*1.55
Cost of Common Stock = 17.245%
2) Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2
Before Tax Cost of Debt = rate(20,20,-1100,1000) * 2
Before Tax Cost of Debt = 2.84 %
After Tax Cost of Debt = 2.84*(1-40%)
After Tax Cost of Debt = 1.70%
WACC = Weight of Common Stock* Cost of Common Stock + Weight of Debt* After Tax cost of Debt
WACC = 0.4797*17.245 + 0.5203*1.70
WACC = 9.16%
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