Titan Mining Corporation has 9.4 million shares of common stock outstanding, 380

Question

Titan Mining Corporation has 9.4 million shares of common stock outstanding, 380,000 shares of 4 percent preferred stock outstanding, and 200,000 8.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.20, the preferred stock currently sells for $92 per share, and the bonds have 10 years to maturity and sell for 113 percent of par. The market risk premium is 8.2 percent, T-bills are yielding 3 percent, and Titan Mining

Explanation / Answer

Question 3 Titan Mining Corporation has 8 million shares of common stock outstanding, 0.5 million shares of 6 percent preferred stock outstanding, and 100,000, 9% semiannual bonds outstanding, pare value $1,000 each. The common stock currently sells for $32 per share and has a beta of 1.15, the preferred stock currently sells for $67 per share, and the bonds have 15 years to maturity and sell for 91% of par. The market risk premium is 10%, T-bills are yielding 5%, and Titan Minings tax rate is 35%.

Ans.

a.     MVD = 100,000($1,000)(0.91) = $91M;    MVE = 8M($32) = $256M

               MVP = 500,000($67) = $33.5M;   V = $91M + 256M + 33.5M = $380.5M

               D/V = 91/380.5 = .2392;    P/V = 33.5/380.5 = .0880;    E/V = 256/380.5 = .6728

       b.     For projects equally as risky as the firm itself, the WACC should be used as the discount rate.

               RE = .05 + 1.15(.10) = 16.50%

               P0 = $910 = $45(PVIFAR%,30) + $1,000(PVIFR%,30);    R = 5.0916%, YTM = 10.1832%

               RD = (1 .35)(.101832) = 6.6191%

               RP = $6/$67 = 8.96%

               WACC = .1650(.6728) + .0896(.0880) + .066191(.2392) = 13.47%

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