Titan Mining Corporation has 8.7 million shares of common stock outstanding, 310

Question

Titan Mining Corporation has 8.7 million shares of common stock outstanding, 310,000 shares of 6 percent preferred stock outstanding, and 165,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.35, the preferred stock currently sells for $85 per share, and the bonds have 20 years to maturity and sell for 116 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 5 percent, and Titan Mining

Titan Mining Corporation has 8.7 million shares of common stock outstanding, 310,000 shares of 6 percent preferred stock outstanding, and 165,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.35, the preferred stock currently sells for $85 per share, and the bonds have 20 years to maturity and sell for 116 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 5 percent, and Titan Mining

Explanation / Answer

we Have P0= $35, beta = 1.35, Krf = 5%, MRP = 7.5%

So Cost of equity Ks = Krf + beta*MRP

= 5% + 1.35*7.5% = 15.13%

Pref Stock is trading at $85, Div rate 6%

So Kp = Div/Current price = 6%*100/85 = 7.06%

We need to calculate weights based on Mkt rates.

So Total Debt = bond issue = 165000*1000*1.16 = $191,400,000

Also Kd = 2*Rate(nper,pmt,pv,fv)

= 2*rate(20*2,75/2,-1160,1000) = 6.10%

Pref stock at mkt rate = 85*310000 = $26,350,000

COmmon stock = $35*8.7M =$304,500,000

Mkt value of Firm = Debt + Pref Stock + COmmon stock

= $522,250,000

So Weight of Debt Wd = 191,400,000/$522,250,000 = 0.3665

Weight of Pref stock Wp = 26,350,000/$522,250,000 = 0.0505

Weight of equity We = 304500000/$522,250,000 = 0.5830

WACC (Ka)= Wd*(Kd)*(1-t) + (We)*(Ke) + (Wp)*(Kp)

where Wd= The proportion of the financing taken on by debt

We= The proportion of the financing provided by equity

T=30%

ie WACC = 0.3665*6.10%*(1-30%) + 0.0505*7.06% + 0.5830*15.13%

ie WACC = 10.74%

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