Titan Mining Corporation has 9.5 million shares of common stock outstanding, 390

Question

Titan Mining Corporation has 9.5 million shares of common stock outstanding, 390,000 shares of 5 percent preferred stock outstanding, and 205,000 8.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $43 per share and has a beta of 1.25, the preferred stock currently sells for $93 per share, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 8.3 percent, T-bills are yielding 4 percent, and Titan Mining's tax rate is 36 percent.

a. What are the firms market value capital structure weights? (Round your answers to 4 decimal places. (e.g., 32.1616)) Market Value Weights

Debt

Preferred stock

Equity

b. If Titan Mining is evaluating a new investment project that has the same risk as the firms typical project, what rate should the firm use to discount the projects cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Discount Rate

Explanation / Answer

Hi,

Please find the detailed answer as follows;

Part A:

Market Value of Equity = Number of Common Shares Outstanding*Market Price Per Share = 9500000*43 = 408500000

Market Value of Preferred Stock = Number of Preferred Stock*Market Price Per Share = 390000*93 = 36270000

Market Value of Debt = Number of Bonds*Par Value*114% = 205000*1000*114% = 233700000

Total Market Value = 408500000 + 36270000 + 233700000 = 678470000

Weight of Equity = 408500000/678470000*100 = 60.2090%

Weight of Preferred Stock = 36270000/678470000*100 = 5.3459%

Weight of Debt = 233700000/678470000*100 = 34.4451%

Part B:

Cost of Debt:

Nper = 15*2 = 30 (indicates the period)

PV = 1000*114% = 1140 (indicates the current selling price)

FV = 1000 (indicates the face value of bonds)

PMT = 1000*8.3%*1/2 = 41.5 (indicates semi-annual interest payment)

After Tax Cost of Debt = Rate(Nper,PMT,PV,FV)*(1-Tax Rate)*2 = Rate(30,41.50,-1140,1000)*2*(1-.36) = 4.350%

Cost of Preferred Stock = Annual Dividend/Current Selling Price*100 = (100*5%)/93*100 = 5.376%

Cost of Equity = Risk Free Rate + Beta*Market Risk Premium = 4 + 1.25*8.3 = 14.375%

Discount Rate = After Cost of Debt*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity = 4.350*34.4451% + 5.376*5.3459% + 14.375* 60.2090% = 10.44%

Answer for Part B is 10.44%

Thanks.

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