Titan Mining Corporation has 9.2 million shares of common stock outstanding, 360
ID: 2767496 • Letter: T
Question
Titan Mining Corporation has 9.2 million shares of common stock outstanding, 360,000 shares of 5 percent preferred stock outstanding, and 190,000 8.0 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $40 per share and has a beta of 1.60, the preferred stock currently sells for $90 per share, and the bonds have 15 years to maturity and sell for 111 percent of par. The market risk premium is 8.0 percent, T-bills are yielding 5 percent, and Titan Mining’s tax rate is 40 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
shares of common stock outstanding = 9.2 million
market value of shares = $40 per share
market capitalised value of share outstanding = 9.2 million * $40 = 3762.8 million
preference stock outstanding = 360000
market value of preferred stock = $ 90
value of preferred stock = $90 * 360000 = 3.24 million
outstanding bonds = 190000
market vlaue of bonds = 190000 * ($1000 * 111%) = 210.9 million
a) Market value of capital structure = 3726.8 million + 3.24 million + 210.9 million
= 3976.94 million
b) discount rate
cost of equity = risk free return + Beta * market risk premium
= 5+ 1.6*8
= 17.8 %
cost of preferred stock = 5%
cost of debt = interest rate * (1- tax)
= 8*(1-.40)
= 4.8%
Discount rate for the project cash flows = cost of equity * weight of equity + cost of prefferred * weight of preferred + cost of debt * weight of debt
= 17.8% * (3762.8 / 3976.94) + 5%* (3.24 / 3976.94) + 4.8% * (210.90 / 3976.94)
= 17.1 %
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.