Titan Mining Corporation has 6.2 million shares of common stock outstanding, 215

Question

Titan Mining Corporation has 6.2 million shares of common stock outstanding, 215,000 shares of 3.5 percent preferred stock outstanding, and 100,000 bonds with a semiannual coupon rate of 5.2 percent outstanding, par value $1,000 each. The common stock currently sells for $74 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $82 per share, and the bonds have 16 years to maturity and sell for 106 percent of par. The market risk premium is 6.9 percent, T-bills are yielding 2.9 percent, and the company’s tax rate is 22 percent.

What is the firm’s market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

1. debt

2. preferred stocks

3. equity

Titan Mining Corporation has 6.2 million shares of common stock outstanding, 215,000 shares of 3.5 percent preferred stock outstanding, and 100,000 bonds with a semiannual coupon rate of 5.2 percent outstanding, par value $1,000 each. The common stock currently sells for $74 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $82 per share, and the bonds have 16 years to maturity and sell for 106 percent of par. The market risk premium is 6.9 percent, T-bills are yielding 2.9 percent, and the company’s tax rate is 22 percent.

Explanation / Answer

Market value of equity=6200000*74=458800000
Market value of preferred stock=215000*82=17630000
Market value of bonds=100000*1000*106%=106000000

Market value capital weights:
Equity=458800000/(458800000+17630000+106000000)=78.7734148%
Preferred Stock=17630000/(458800000+17630000+106000000)=3.0269732%
Debt=106000000/(458800000+17630000+106000000)=18.199612%

Cost of equity=risk free rate+beta*market risk premium=2.9%+1.1*6.9%=10.49%
Cost of preferred stock=Preferred Dividend/Preferred share price=100*3.5%/82=4.2683%
Pre-tax Cost of debt=ytm=RATE(16*2,5.2%*1000/2,-106%*1000,1000)*2=4.6637%

WACC=78.7734148%*10.49%+3.0269732%*4.2683%+18.199612%*4.6637%*(1-22%)=9.0546%

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