12 0,.00 points value: Titan Mining Corporation has 9.6 million shares of common
ID: 2789529 • Letter: 1
Question
12 0,.00 points value: Titan Mining Corporation has 9.6 million shares of common stock outstanding, 400,000 shares of 6 percent preferred stock outstanding, and 210,000 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $44 per share and has a beta of 1.30, the preferred stock currently sells for $94 per share, and the bonds have 20 years to maturity and sell for 115 percent of par. The market risk premium is 8.4 percent, T-bills are yielding 4 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 3tait Debt Preferred stock 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 rateExplanation / Answer
value of equity = 9.6 million * 44 = 422400000 = 422.4 million
value of debt = 210000 * 1000 * 115% = 241500000 = 241.5 million
value of preferred stock = 400000 * 94 = 37600000 = 37.6 million
total value = 422400000 + 241500000 + 37600000
= 701.5 million
weight of equity = 422.4/701.5 = 0.6021
weight of debt = 241.5/701.5 = 0.3443
weight of preferred stock = 37.6/701.5 = 0.0536
cost of equity = 4 + 1.3 * 8.4% = 14.92%
1150 = 84/2 * [1-(1+YTM/2)^-40]/YTM/2 + 1000/(1+YTM/2)^40
=>
YTM = 7%
after tax cost of debt = 7% * (1-0.4) = 4.2%
cost of preferred stock = 6/94 = 6.38%
weighted average cost of capital
= weight of debt * cost of debt + weight of preferred stock * cost of preferred stock + weight of equity * cost of equity
= 0.6021 * 14.92% + 0.3443 * 4.2% + 0.0536 * 6.38%
= 10.77%
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