Titan Mining Corporation has 8.5 million shares of common stock outstanding, 290

Question

Titan Mining Corporation has 8.5 million shares of common stock outstanding, 290,000 shares of 4 percent preferred stock outstanding, and 155,000 7.3 percent semiannual bonds outstanding, par value 61,000 each. The common stock currently sells for $33 per share and has a beta of 1.25, the preferred stock currently sells for $83 per share, and the bonds have 10 years to maturity and sell for 114 percent of par. The market risk premium is 7.3 percent, T -bills are yielding 6 percent, and Titan Mining's tax rate is 38 percent. a. What is the firm's market value capital structure? (Round your answers to 4 decimal places. (e.g., 32.1616)) Market value Debt 0.3672 Preferred stock 0.0500 Equity 0.5828 b. If Titan Mining 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 and round your final answer to 2 decimal places. (e.g., 32.16)) Discount rate

Explanation / Answer

cost of equity = 6% + 1.25 * 7.3% = 15.125%

costof preferred stock = 4/83 = 4.819%

1140 = 36.5 * PVIFA(r%,20) + 1000 * PVIF(r%,20)

r =2.73

after tax cost of debt = 2 * 2.73% * (1-0.38) = 3.3852%

discount rate = 0.3672 * 3.3852 + 0.05 * 4.819 + 0.5828 * 15.125

= 10.30%

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