Raymond Mining Corporation has 9.9 million shares of common stock outstanding. 4
ID: 2743104 • Letter: R
Question
Raymond Mining Corporation has 9.9 million shares of common stock outstanding. 430.000 shares of 6 dollar preferred stock outstanding, and 171.000 7.5 percent semiannual bonds outstanding, par value dollar 1,000 each. The common stock currently sells for dollar 47 per share and has a beta of 1.45, the preferred stock currently sells for dollar 96 per share, and the bonds have 20 years to maturity and sell for 118 percent of par. The market risk premium is 8.7 percent, T-bills are yielding 5 percent, and Adex Mining's tax rate is 40 percent. What is the firm's market value capital structure? (Round your final answers to 4 decimal places, (e.g., 32.1616)) Market value Debt Preferred stock Equity If Raymond Mining 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 round your final answer to 3 decimal places, (e.g., 32.161)) Discount rate percentageExplanation / Answer
a)
Market value of debt is calculated as follows.
Debt = [(171,000×$1,000) × 1.18]
= $201.7800 million
Market value of Preferred stock = 430,000 × $96
= $48.2800 million
Market value of equity is calculated by multiplying the number of common stock (shares) outstanding by Market value of each share.
Equity = $47 × 9.9 Million
= 465.3 million
Calculation of discount rate:
Discount rate is calculated by using CAPM as follows.
Discount rate = Rf + (Rp)
= 5 + (8.7) 1.45
= 17.62%
Where Rf = Risk free return
Rp = Market risk premium
= Beta of stock
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