Titan Mining Corporation has 9 million shares of common stock outstanding, 340,0
ID: 2714217 • Letter: T
Question
Titan Mining Corporation has 9 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 the company’s tax rate is 36 percent.
What is the firm’s market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)
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 project’s cash flows? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
a.What is the firm’s market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)
Market value weight 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 project’s cash flows? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Value of debt = 180,000 * 1000 = 180,000,000
Cost of Bond can be calculated as follows
YTM = rac{C+ rac{F-P}{n}}{ rac{F+P}{2}}
Here C = 7.8% * 1000 = 78
F = 1000
P = 1190
n = 20
After substituting values in the formula we get YTM as 6.26%
Cost of equity = CAPM model
= 3% + 1.50 * 7.8% = 14.70%
Value of equity = 9,000,000 * 38 = 342,000,000
Cost of Preferred equity = 6%
Value of Preferred equity = 340,000 * 88 = 29,920,000
All the above numbers are as below in the table
Total value of company = Total of all values = 551,920,000
After tax cost of debt = 6.26% * (1-36%) = 4.01%
WACC = Summation of (Weight of Security * Cost of that security) = 10.85%
Value Cost Bond 180,000,000 6.26% Equity 342,000,000 14.70% Prefered Equity 29,920,000 8.00%Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.