Titan Mining Corporation has 8.6 million shares of common stock outstanding, 300
ID: 2726705 • Letter: T
Question
Titan Mining Corporation has 8.6 million shares of common stock outstanding, 300,000 shares of 5 percent preferred stock outstanding, and 160,000 7.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.30, the preferred stock currently sells for $84 per share, and the bonds have 15 years to maturity and sell for 115 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3 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 MV Calculation MV Weights Debt 184000000 1000*115%*160000 36.683 Preferred Stock 25200000 300000*84 5.024 Equity 292400000 8600000*34 58.293 501600000 100.000 b. Calculation of Discount Rate Cost of Debt 1150=(37*((1-(1+r)^-30)/r))+(1000/(1+r)^30) Semi-annual r= 0.0294 Annual r= 0.0294*2 =0.0588 ie. 5.88% After-tax cost of Debt = 5.88%*(1-0.40)= 0.03528 = 3.53% Cost of Preferred stock 5% Cost of Equity = Risk-free Rate+Beta*(Market Risk Premium) 0.03+(1.3*0.074) 0.1262 12.62% Type of capital MV MV Weights Cost Wt.*Cost Debt 184000000 0.36683 0.0353 0.012949 Preferred Stock 25200000 0.05024 0.05 0.002512 Equity 292400000 0.58293 0.1262 0.073566 501600000 1 0.089027 WACC 8.90% Rate to be used to discount project's cash flows is its WACC = 8.90%
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