Titan Mining Corporation has 9.4 million shares of common stock outstanding and

Question

Titan Mining Corporation has 9.4 million shares of common stock outstanding and 380,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.2, and the bonds have 10 years to maturity and sell for 113 percent of par. The market risk premium is 8.2 percent, T-bills are yielding 3 percent, and the company’s tax rate is 35 percent. a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.) Weight Debt 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 and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate %

Explanation / Answer

Answer:a Equity market value=9.4 million shares*$42=394800000

Debt market value=380000*1000*113%=$429400000

Answer:b

Cost of equity=Risk free rate+beta*Market risk premium

=3%+1.2*8.2%

=12.84%

Cost of Debt:

1130=$20*PVIFA(r%,20)+$1000*PVIF(r%,20)

R=1.26% semiannually

R=1.26%*2=2.52% annually

Cost of Debt after tax=2.52%*(1-0.35)=1.638%

Capital structure Market value Weight equity 394800000 0.47901 Debt 429400000 0.52099 Total 824200000

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