Titan Mining Corporation has 9.3 million shares of common stock outstanding, 370

Question

Titan Mining Corporation has 9.3 million shares of common stock outstanding, 370,000 shares of 6 percent preferred stock outstanding, and 195,000 8.1 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $41 per share and has a beta of 1.15, the preferred stock currently sells for $91 per share, and the bonds have 20 years to maturity and sell for 112 percent of par. The market risk premium is 8.1 percent, T-bills are yielding 4 percent, and the company's tax rate is 40 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.)

Explanation / Answer

a. Market Value Capital Structure : Equity + Debt

MV OF DEBT  = 195,000($1,000)(1.12) = $218,400,000

MV OF PREF STOCK = 370,000($91) = $33,670,000

MV OF EQUITY = 9,300,000($41) = $381,300,000

MARKET VALUE = $218,400,000 + $33,670,000 + $381,300,000 = $633,370,000

To find the market value weights the Debt/Stock/equity to be divided by the total value

Debt/Value = $218,400,000/$633,370,000 = 0.3448

Pref.Stock/Value = $33,670,000/$633,370,000 = 0.0531

Equity/Value = $381,300,000/$633,370,000 = 0.6020

b.

For projects equally as risky as the firm itself, the WACC should be used as the discount rate.

First we can find the cost of equity using the CAPM. The cost of equity is:

Re = .04 + 1.15(.081) = .1331 or 13.31%

The cost of debt is the YTM of the bonds, so:

P0= $1120 = $72.8(PVIFAR%,40) + $1,000(PVIFR%,40) Taken @ 40 percent interest rate for 20 years PV .

R = 2.385%

YTM = 2.385% × 2 = 4.77%

And the aftertax cost of debt is:

RD= (1 – .35)(.0477) = .0310 or 3.10%

The cost of preferred stock is:

RP= 6%/$91 = .0659 or 6.59%

Now we can calculate the WACC as:

WACC = .0310(.3448) + .1331(.06020) + .0659(.0531) = .0941

Discount Rate : 9.41%

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