Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320

Question

Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.40, the preferred stock currently sells for $86 per share, and the bonds have 10 years to maturity and sell for 117 percent of par. The market risk premium is 7.6 percent, T-bills are yielding 5 percent, and Titan Mining’s tax rate is 38 percent. a. What is the firm’s market value capital structure? (Round your answers to 4 decimal places. (e.g., 32.1616)) Market value Debt Preferred stock Equity b. If Titan 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 2 decimal places. (e.g., 32.16)) Discount rate %

Explanation / Answer

Titan Mining Corporation All Amounts in $ Firm's Market Value Capital Structure Particulars of Capital No. Face Market Total Capital Rate Weighted Value Value Market Market per share per share Value Value $ $ $ $ Common Stock 8800000 10 36 316800000 4% 11531520.00000 4% Preferred Stock 320000 10 86 27520000 4% 1100800.00000 7.6% Semiannual Bonds 170000 100 117 19890000 5% 937216.80000 Market Value Capital Structure 364210000 13569536.80000 Assuming that the investment project has the same risk as the firm's typical projects, the rate which the firm should use to discount the project's cash flows will be the Weighted Average Cost of Capital or WACC which is worked out using the formula Weighted Market Value / Total Market Value = 13,569,537 / 364,210,000 = 3.73%

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