Titan Mining Corporation has 14 million shares of common stock outstanding, 900,

Question

Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of preferred stock outstanding that pays a 9% annual dividend and 210,000, 10% semiannual bonds outstanding. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91% of par. The market risk premium is 11.5%, T-bills are yielding 7.5%, and the firm's tax rate is 32%. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project?

Explanation / Answer

Bond details Bond Par Value                           1,000 Bond Market Price@91% of face value                               910 Years To maturity                           17.00 Annual Interest @10%=                               100 YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3 YTM =[100 +(1000-910)/17]/(1000+2*910)/3 YTM =11.21% Tax rate =32% So Post Tax Cost of Debt= 11.21%*(1-0.32)= 7.62% No of Bonds =                       210,000 Total Market value of Bonds=              191,100,000 Preferred stock Nos of preferred stock Outstanding=                       900,000 Price of preferred stock                                 80 Market Value of preferred stock=                 72,000,000 dividend per preferred stock=                                    9 Cost Per preferred stock=9/80= 11.25% Common Equity No of common shares outstanding                 14,000,000 Share price                                 34 Market value of Common Stock=              476,000,000 Equity Beta=                              1.15 Market Risk Premium=Rpm= 11.50% Risk Free rate=Rf=T Bill Rate 7.5% Cost of Equity= Rf+Rpm*beta =7.5%+11.5%*1.15= 20.73% WACC Calculation Type of Capital Market Value % Wt of value Post Tax cost Wtd Cost Debt              191,100,000 25.86% 7.62% 1.97% Preferred Stock                 72,000,000 9.74% 11.25% 1.10% Common Equity              476,000,000 64.40% 20.73% 13.35% Total              739,100,000 16.41% So WACC is 16.41% So Applicable discount rate will be 16.41%

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