Titan Mining Corporation has 8.3 million shares of common stock outstanding, 270
ID: 2732191 • Letter: T
Question
Titan Mining Corporation has 8.3 million shares of common stock outstanding, 270,000 shares of 5 percent preferred stock outstanding, and 145,000 7.1 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $31 per share and has a beta of 1.15, the preferred stock currently sells for $81 per share, and the bonds have 15 years to maturity and sell for 112 percent of par. The market risk premium is 7.1 percent, T-bills are yielding 4 percent, and the company’s tax rate is 30 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 8.3 million shares of common stock outstanding, 270,000 shares of 5 percent preferred stock outstanding, and 145,000 7.1 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $31 per share and has a beta of 1.15, the preferred stock currently sells for $81 per share, and the bonds have 15 years to maturity and sell for 112 percent of par. The market risk premium is 7.1 percent, T-bills are yielding 4 percent, and the company’s tax rate is 30 percent.
Explanation / Answer
a. Market value of debt = 145,000 * $1,000 * 112%
= $162,400,000
Market value of preferred stock = 270,000 * $81
= $21,870,000
Market value of equity = 8,300,000 * $31
= $257,300,000
Enterprise value = $162,400,000 + $21,870,000 + $257,300,000
= $441,570,000
b. By solving financial calculator, we get before tax cost of debt = 5.87%
Cost of preferred stock = 5%
Cost of equity = 4% + 1.15 * 7.1%
= 12.165%
Discount rate = 5.87% * (1 - 30%) * 0.3678 + 5% * 0.0495 + 12.165% * 0.5827
= 8.85%
Market value weight Debt = $162,400,000 / $441,570,000 0.3678 Preferred stock = $21,870,000 / $441,570,000 0.0495 Equity = $257,300,000 / $441,570,000 0.5827Related Questions
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