Titan Mining Corporation has 8.6 million shares of common stock outstanding, 300

Question

Titan Mining Corporation has 8.6 million shares of common stock outstanding, 300,000 shares of 5 percent preferred stock outstanding, and 160,000 7.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.30, the preferred stock currently sells for $84 per share, 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. Round your answers to 4 decimal places, e.g., 32.1616.) Market value weight Debt Preferred stock 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate

Explanation / Answer

a. Market value capital structure of the firm:

b. Computation of WACC:

The weighted average cost of capital is therefore 6.74%

Cash flows of a new investment project should be discounted at 6.74% to evaluate the project.

Capital Number of units Market value per unit Total market values Common stock 8,600,000 $ 34 $ 292,400,000 Preferred stock 300,000 $ 84 $ 25,200,000 Debt 160,000 $ 1,150 $ 184,000,000 Total $ 501,600,000

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