Titan Mining Corporation has 9.4 million shares of common stock outstanding and
ID: 2767698 • Letter: T
Question
Titan Mining Corporation has 9.4 million shares of common stock outstanding and 380,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.2, and the bonds have 10 years to maturity and sell for 113 percent of par. The market risk premium is 8.2 percent, T-bills are yielding 3 percent, and the company’s tax rate is 35 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 in percentage
Explanation / Answer
Ans;
Titan Mining Corporation has 8 million shares of common stock outstanding, 0.5 million shares of 6 percent preferred stock outstanding, and 100,000, 9% semiannual bonds outstanding, pare value $1,000 each. The common stock currently sells for $32 per share and has a beta of 1.15, the preferred stock currently sells for $67 per share, and the bonds have 15 years to maturity and sell for 91% of par. The market risk premium is 10%, T-bills are yielding 5%, and Titan Minings tax rate is 35%.
Ans.
a. MVD = 100,000($1,000)(0.91) = $91M; MVE = 8M($32) = $256M
MVP = 500,000($67) = $33.5M; V = $91M + 256M + 33.5M = $380.5M
D/V = 91/380.5 = .2392; P/V = 33.5/380.5 = .0880; E/V = 256/380.5 = .6728
b. For projects equally as risky as the firm itself, the WACC should be used as the discount rate.
RE = .05 + 1.15(.10) = 16.50%
P0 = $910 = $45(PVIFAR%,30) + $1,000(PVIFR%,30); R = 5.0916%, YTM = 10.1832%
RD = (1 .35)(.101832) = 6.6191%
RP = $6/$67 = 8.96%
WACC = .1650(.6728) + .0896(.0880) + .066191(.2392) = 13.47%
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