Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320

Question

Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.40, the preferred stock currently sells for $86 per share, and the bonds have 10 years to maturity and sell for 117 percent of par. The market risk premium is 7.6 percent, T-bills are yielding 5 percent, and the company’s tax rate is 38 percent. 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

Total Market Value of common stock=Stock Outstanding * Market Price=8800000*36 (A) 316800000 Total Market Value of preferred stock=Stock Outstanding * Market Price=320000*86 (B) 27520000 Total Market Value of the bonds=Bonds outstanding * Market Price=170000*1170 © 198900000 Total Capital =T=A+B+C 543220000 (a) Market Value weight of common stock=A/T 0.58 Market Value weight of preferred stock=B/T 0.05 Marjet Value weight of bonds=C/T 0.37 (b) Cost of common stock=RF+Beta*Market Premium. Here RF=5 , Beta=1.40, Market Premium=7.6 Cost of common stock=RF+Beta*Market Premium=5+1.4*7.6 15.64 Cost of preferred stock 4 YTD of Bonds= [C+(M-P)/n]/(0.4M+0.6P) . Here Coupon=(7.6/2)*1000=38 , P=117% of 1000=1170 , n=2*10-20 YTD of Bonds= [C+(M-P)/n]/(0.4M+0.6P) =(38+(1000-1170)/20)/(0.4*1000+0.6*1170) 0.027 YTM Annual=2*0.027=0.054 or 5.4% 5.4 Cost of debt=YTD*(1-Tax)=5.4*(1-0.38) 3.35 WACC=Sum of (Proportion of each capital * Cost of that Capital)=0.58*15.64+0.05*4+0.37*3.35 10.51 So the firm should use a discount rate of 10.51%.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.