Titan Mining Corporation has 8.4 million shares of common stock outstanding, 280
ID: 2727477 • Letter: T
Question
Titan Mining Corporation has 8.4 million shares of common stock outstanding, 280,000 shares of 6 percent preferred stock outstanding, and 150,000 7.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $32 per share and has a beta of 1.20, the preferred stock currently sells for $82 per share, and the bonds have 20 years to maturity and sell for 113 percent of par. The market risk premium is 7.2 percent, T-bills are yielding 5 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.)
Titan Mining Corporation has 8.4 million shares of common stock outstanding, 280,000 shares of 6 percent preferred stock outstanding, and 150,000 7.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $32 per share and has a beta of 1.20, the preferred stock currently sells for $82 per share, and the bonds have 20 years to maturity and sell for 113 percent of par. The market risk premium is 7.2 percent, T-bills are yielding 5 percent, and the company’s tax rate is 40 percent.
Explanation / Answer
a. The firm's market value capital structure:
b. Weighted average cost of capital :
Preferred stock
The weighted average cost of capital = 9.61 %
Hence, the firm should use a rate of 9.61% to discount the project's cash flows.
Market values Market value weights Debt 169.5 million 0.3674 Preferred Stock 22.96 million 0.0498 Equity 268.8 million 0.5828 Total 461.26 million 1.0000Related Questions
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