Titan Mining Corporation has 8.2 million shares of common stock outstanding and

Question

Titan Mining Corporation has 8.2 million shares of common stock outstanding and 260,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $30 per share and has a beta of 1.1, and the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7 percent, T-bills are yielding 3 percent, and the company’s tax rate is 38 percent. a. What is the firm's market value capital structure? need the debt and Equity weight 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? Discount Rate:

Explanation / Answer

Answer:a MVfirm= ?

We will begin by finding the market value of each type of financing. We find:

MVD= 260,000*$1000*110% = $2860,00,000

MVE= 8,200,000($30) = $2460,00,000

And the total market value of the firm is:

MV = $2860,00,000+$2460,00,000

=$5320,00,000

So, the market value weights of the company’s financing is:

D/V = $2860,00,000/$5320,00,000=0.5376

E/V = $2460,00,000/$5320,00,000=0.4624

Answer:b For projects equally as risky as the firm itself, the WACC should be used as the discount rate.

First we can find the cost of equity using the CAPM.

The cost of equity is:

RE= Rf+*(Rm– Rf)RE

= 0.03 + 1.1(0.07) = 0.107 or 10.70%

Calculation of cost of debt:

1100=$20*PVIFA(r%,20)+$1000*PVIF(r%,20)

r=1.42% semiannually

r=2.84% Annually

The cost of debt is 2.84%,

And the after-tax cost of debt is:

RD= (1 – 0.38)(0.0284) = 0.017608 or 1.7608%

Now we can calculate the WACC as:

WACC = wE*RE+ wD*RD(1 – Tc)

WACC =0.4624 *0.107 + 0.5376*0.017608= 5.89%

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