Titan Mining Corporation has 8.2 million shares of common stock outstanding, 260
ID: 2718794 • Letter: T
Question
Titan Mining Corporation has 8.2 million shares of common stock outstanding, 260,000 shares of 4 percent preferred stock outstanding, and 140,000 7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $30 per share and has a beta of 1.10, the preferred stock currently sells for $80 per share, and the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7 percent, T-bills are yielding 3 percent, and the company’s tax rate is 38 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.)
Titan Mining Corporation has 8.2 million shares of common stock outstanding, 260,000 shares of 4 percent preferred stock outstanding, and 140,000 7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $30 per share and has a beta of 1.10, the preferred stock currently sells for $80 per share, and the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7 percent, T-bills are yielding 3 percent, and the company’s tax rate is 38 percent.
Explanation / Answer
a)
Market Value of Common Stock = 8.2Milion * 30 = $ 246 Million
Market value of Preferred Stock = 0.26 Miillion * 80 = $ 20.80 Million
Market Value of Bond = 0.14 Million *1000*110% = $ 154 Million
Total Market Value = 246 + 20.80 + 154 = $ 420.80 Million
Weight of Common Stock = 246/420.80 = 0.5846
Weight of Preferred Stock =20.80/420.80 = 0.0494
Weight of Debt = 154/420.80 =0.3660
Answer
b)
1) Cost of Common Stock = Rf + (Rm-Rf)*Beta
Cost of Common Stock = 3 + 7*1.1
Cost of Common Stock = 10.70%
2) Cost of Preferred Stock = 4/80
Cost of Preferred Stock = 5%
3)
Before Tax Cost of Debt = rate(nper,pmt,pv,fv)
Before Tax Cost of Debt = rate(20,35,-1100,1000)*2
Before Tax Cost of Debt = 5.68 %
After Tax Cost of Debt = 5.68*(1-38%)
After Tax Cost of Debt = 3.52%
WACC = Weight of Common Stock* Cost of Common Stock + Weight of Preferred Stock* Cost of Preferred Stock + Weight of Debt* After Tax cost of Debt
WACC = 0.5846*10.70 + 0.0494*5 + 0.3660 *3.52
WACC = 7.79%
Answer
Discount rate = 7.79%
Debt 0.3660 Preferred Stock 0.0494 Equity 0.5846Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.