Deep Mines has 14 million shares of common stock outstanding with a beta df 1.15

Question

Deep Mines has 14 million shares of common stock outstanding with a beta df 1.15 and a market price of $42 a share. There are 900,000 shares of 9 percent preferred stock outstanding valued at $80 a share. The 10 percent semiannual bonds have a face value of $1,000 and are selling at 91 percent of par. There are 220.000 bonds outstanding that mature in 17 years. The market risk premium is 11.5 percen percent. 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? t, T-bills are yielding 7.5 percent, and the firm's tax rate is 32 14.59 percent 14.72 percent 15.17 percent 15.54 percent 13.15 percent

Explanation / Answer

Ans. The given options are not correct there may be an another answer. WACC      =      16.88% MV (debt) 220000 * 1000 * 91% 200200000 MV (equity) 14000000 * 42 588000000 MV (preference) 900000 * 80 72000000 Total Market Value 860200000 Weight: Debt MV of debt / Total Value 200200000 / 860200000 0.232737 Equity MV of preference / Total Value 588000000 / 860200000 0.683562 Preference MV of equity / Total Value 72000000 / 860200000 0.083701 Re = (1.15 * 0.115) + 0.075 0.20725 Rp = 9 /80 0.1125 Rd before tax = [(1-91%) * 1000 / 2]*[(1-{1/[1+(r/2)]17*2})/(r/2)]+1000/[1+(r/2)]17*2 0.11195 Rd after tax = 0.11195 * (1-32%) 0.076127 WACC = (0.683562 * 0.20725) + (0.083701 * 0.1125) + (0.232737 * 0.076127) 0.1688 OR   16.88%

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