I found the answers to part one but am having trouble coming up with the answer
ID: 2625499 • Letter: I
Question
I found the answers to part one but am having trouble coming up with the answer to b.
Titan Mining Corporation has 9.1 million shares of common stock outstanding, 350,000 shares of 4 percent preferred stock outstanding, and 185,000 7.9 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $39 per share and has a beta of 1.55, the preferred stock currently sells for $89 per share, and the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7.9 percent, T-bills are yielding 5 percent, and Titan Mining's tax rate is 40 percent.
What is the firm
a.What is the firm
Explanation / Answer
a)
market value of debt = 185000 * 1000 * 1.10 = 203500000
market value of equity = 9100000 * 39 = 354900000
market valye of preferred stock = 350000 * 89 = 31150000
total market value = 203500000 + 354900000 + 31150000 = 589550000
weight of debt = 203500000/589550000 = 0.3452
weight of equity = 354900000/589550000 = 0.6020
weight of preferred stock = 31150000/589550000 = 0.0528
b)
cost of equity = 5% + 1.55 *7.9% = 17.245%
1100 = 39.5 *PVIFA(r%,20) + 1000 * PVIFA(r%,20)
r = 3.26%
before tax cost of debt = 2 * 3.26% = 6.52%
after tax cost of debt = 6.52% * (1-0.4) = 3.912%
cost of preferred stock = 4/89 = 400/89%
WACC = weight of debt * after tax cost of debt + weight of equity * cost of equity + weight of preferred stock*cost of preferred stock
= 0.3452 * 3.912% + 0.6020 * 17.245% + 0.0528 * 400/89%
= 11.97%
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