O extomheducation.com/hm.tpx Titan Mining Corporation has 9 million shares of co
ID: 2656000 • Letter: O
Question
O extomheducation.com/hm.tpx Titan Mining Corporation has 9 million shares of common stock outstanding, 340,000 shares of preferred stock outstanding, and 180,000 bonds outstanding with a par value of $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 sell for 119 percent of par The cost of common equity is 14.70 percent maturity is 6.14. The company's marginal tax rate is 36 percent a. Use the market values to calculate the firm's capital structure weights. (Do not round intermediate calculations. Leave as a decimal and round your answers to 4 decimal places, e.g., 0.1616.) Market Debt Preferred stock Equity b. If the company 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 pr yield to maturity to an EAR (Do not roun percent rounded to 2 decimal places, e.g32.16.) oject's cash flows? Note. You don't need to convert the d intermediate calculations. Enter your answer as a Discount rate References eBook & Resources Worksheet Learning Objective 14-03 How to determine a firms overall cost of F3 F4 FS F6 F9 F1012 2Explanation / Answer
Answer a.
Debt:
Number of bonds outstanding = 180,000
Face Value = $1,000
Current Price = 119%*$1,000 = $1,190
Value of Debt = 180,000 * $1,190
Value of Debt = $214,200,000
Before-tax Cost of Debt = 6.14%
After-tax Cost of Debt = 6.14% * (1 - 0.36)
After-tax Cost of Debt = 3.9296%
Preferred Stock:
Number of shares outstanding = 340,000
Current Price = $88
Value of Preferred Stock = 340,000 * $88
Value of Preferred Stock = $29,920,000
Cost of Preferred Stock = 6.82%
Equity:
Number of shares outstanding = 9,000,000
Current Price = $38
Value of Common Stock = 9,000,000 * $38
Value of Common Stock = $342,000,000
Cost of Common Equity = 14.70%
Value of Firm = Value of Debt + Value of Preferred Stock + Value of Common Stock
Value of Firm = $214,200,000 + $29,920,000 + $342,000,000
Value of Firm = $586,120,000
Weight of Debt = $214,200,000/$586,120,000
Weight of Debt = 0.3655
Weight of Preferred Stock = $29,920,000/$586,120,000
Weight of Preferred Stock = 0.0510
Weight of Common Stock = $342,000,000/$586,120,000
Weight of Common Stock = 0.5835
Answer b.
WACC = Weight of Debt*After-tax Cost of Debt + Weight of Preferred Stock*Cost of Preferred Stock + Weight of Common Stock*Cost of Common Stock
WACC = 0.3655*3.9296% + 0.0510*6.82% + 0.5835*14.70%
WACC = 10.36%
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