Titan Mining Corporation has 8.4 million shares of common stock outstanding, 280
ID: 2383570 • Letter: T
Question
Titan Mining Corporation has 8.4 million shares of common stock outstanding, 280,000 shares of 6 percent preferred stock outstanding, and 150,000 7.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $32 per share and has a beta of 1.20, the preferred stock currently sells for $82 per share, and the bonds have 20 years to maturity and sell for 113 percent of par. The market risk premium is 7.2 percent, T-bills are yielding 5 percent, and the company’s tax rate is 40 percent.
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.)
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.)
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.)
Explanation / Answer
Answer:
b) Cost of equity: Applying the CAPM - Ke = Risk free rate+Beta*market risk premium
= 5% + 1.2 * 7.2% = 13.64%
Cost of preferred stock = Annual Coupon/Market price of share = (6/82)*100 = 7.32%
Cost of debt calculation = YTM of the bond
Market price of debt = Semi annual Coupon payment* {1-(1+r)-n}/r + Face value of debt/(1+r)n
Where r = semi annual YTM
n = 2* no. of years to maturity = 2*20 = 40
$1113 = 72*50% {1-(1+r)-40}/r + 1000/(1+r)40
Solving for "r" we get 3.10% (can be solved or obatined using financial calculator)
Annual YTM = 3.10*2 = 6.2%
b) The firm should use WACC as the discount rate for the project cash flows:
Nos Market Price Market value Weight Debt 150000 1113 166950000 0.36 Preferred Stock 280000 82 22960000 0.05 Equity 8400000 32 268800000 0.59 Total 458710000 1Related Questions
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