(7 points) Titan Mining Corporation has 14 million shares of common stock outsta

Question

(7 points) Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of 8% preferred stock outstanding and 210,000 semiannual bonds outstanding with coupon rate of 10%, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.5, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The expected return on the market portfolio is 15%, T-bills are yielding 3%, and the firm's tax rate is 34 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?

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Explanation / Answer

Debt

Market value of debt = 91%*1000*210000=191100000

Let cost of debt be r

910= 50*(1-1/(1+r/2)^34)/(r/2) +1000/(1+r/2)^34

Cost of debt ,r= 11.20%

Equity

Re= 3%+ 1.5*(15%-3%)= 21%

Market value of common stock= 14000000*35=$490000000

Preferred stock

Cost of preferred stock = 8%*100/80= 10%

Market value of preffered stock= 900,000*80= 72,000,000

Total value = 191100000+ 490000000+ 72,000,000=753100000

Cost of capital = (191100000*11.20%*(1-34%)+ 490000000*21%+ 72,000,000*10%)/753100000

Cost of capital = 16.49%

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