Titan Mining Corporation has 8.6 million shares of common stock outstanding and

Question

Titan Mining Corporation has 8.6 million shares of common stock outstanding and 300,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.3, and the bonds have 15 years to maturity and sell for 115 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3 percent, and the company’s tax rate is 40 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

Requirement a:

Market Value of Common Stock = 34 * 8.6 million = $292.4 millions

Market Value of Bonds:

Required Rate of Return

= Rf + (Rm - Rf)beta

= 3 + (7.4 * 1.3)

= 3 + 9.62

= 12.62

Rate of Return after tax = 12.62 (1-0.4) = 7.572%

Semiannual Rate = 7.572/2 = 3.786%

Par Value = $1000

Semi Annual Interest = 300000 * $1000 * 5% * 6/12 = $7500000

Maturity Value = 300000 * $1000 * 115% = $345000000

Maturity Period = 15 years

Number of compounding = 15 * 2 = 30

Market Value = (Interest * PVAF (3.786%, 30)) + (Maturity Value * PVIF (3.786%, 30))

= (7500000 * 17.75034) + (345000000 * 0.327972)

= 133127550 + 113150340

= 246277890

Firm’s Market Value of Capital Structure = 292400000 + 246277890 = $538677890

Requirement b:

The rate to be used = 7.572%

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