Titan Mining Corporation has 9.3 million shares of common stock outstanding and
ID: 2693588 • Letter: T
Question
Titan Mining Corporation has 9.3 million shares of common stock outstanding and 260,000 6.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.2, and the bonds have 20 years to maturity and sell for 104 percent of par. The market risk premium is 7 percent, T-bills are yielding 3.5 percent, and Titan Mining's tax rate is 35 percent? A. What is the firm's market value capital structure? 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 flow?Explanation / Answer
Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, Tbills are yielding 7.5 percent, and the firm's tax rate is 32 percent. What 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?
A. 14.59 percent
B. 14.72 percent
C. 15.17 percent
D. 15.54 percent
E. 16.41 percent
MVD = 210,000 ($1,000) (0.91) = $191,100,000
MVE = 14,000,000 ($34) = $476,000,000
MVP = 900,000 ($80) = $72,000,000
V = $191,100,000 + $476,000,000 + $72,000,000 = $739,100,000
D/V = $191,100,000/$739,100,000 = 0.258558
E/V = $476,000,000/$739,100,000 = 0.644027
P/V = $72,000,000/$739,100,000 = 0.097416
RE = 0.075 + 1.15(0.115) = 0.20725
RP = $9/$80 = 0.1125 RD Aftertax = 0.1119514 (1 - 0.32) = 0.076127
WACC = 0.644027(0.20725) + 0.097416 (0.1125) + 0.258558 (0.076127) = 16.41
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