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ID: 2799127 • Letter: P
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6. value: 10.00 points You did not receive full credit for this question in a previous attempt Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of 5 percent preferred stock outstanding, and 175,000 7.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $37 per share and has a beta of 1.45, the preferred stock currently sells for $87 per share, and the bonds have 15 years to maturity and sell for 118 percent of par The market risk premium is 7.7 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 Debt Preferred stock 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rateExplanation / Answer
Market value of equity = 8900000*37 = 329300000
Market value of preferred stock = 330000*87 = 28710000
Market value of debt = 175000*1180 = 206500000
Total = 329300000 + 28710000 + 206500000 = 564510000
Weight of debt = 206500000/564510000 = 0.3658 = 36.58%
Weight of preferred stock = 28710000/564510000 = 0.0509 = 5.09%
Weight of equity = 329300000/564510000 = 0.5833 = 58.33%
b.
Cost of equity:
According to capm,
Cost of equity = risk free rate + beta*market risk premium
= 4% + 1.45*7.7% = 15.165%
Cost of debt:
PV = 1180
N = 15*2 = 30
PMT = 0.077*1000/2 = 38.5
FV = 1000
R = ?
Using excel function, R = Rate(N,PMT,PV,FV)
Rate(30,-38.5,1180,-1000) = 0.0294
Annual Cost of debt = YTM = 0.0294*2 = 0.0588 = 5.88%
Cost of preferred stock = Dividend/Price = 5/87 = 0.0575 = 5.75%
WACC = rD (1- Tc )*( D / V )+ rE *( E / V )
Where...
rD = The required return of the firm's Debt financing
(1-Tc) = The Tax adjustment for interest expense
(D/V) = (Debt/Total Value)
rE= the firm's cost of equity
(E/V) = (Equity/Total Value)
WACC = 0.3658*0.0588*(1-0.4) + 0.0509*0.0575 + 0.5833*0.15165 = 0.1043 = 10.43%
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