Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330
ID: 2656225 • Letter: T
Question
Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of preferred stock outstanding, and 175,000 bonds outstanding with a par value of $1,000 each.
The common stock currently sells for $37 per share and has a beta of 1.45, the preferred stock currently sells for $87 per share, and the bonds sell for 118 percent of par.
A. The cost of common equity is 15.17 percent, preferred equity is 5.75 percent, and the debt's yield to maturity is 5.88. The company’s marginal tax rate is 40 percent.
B. Use the market values to calculate the firm's capital structure weights (debt, Preferred stock, equity).
If the company 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? Note: You don't need to convert the yield to maturity to an EAR.
Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of preferred stock outstanding, and 175,000 bonds outstanding with a par value of $1,000 each.
The common stock currently sells for $37 per share and has a beta of 1.45, the preferred stock currently sells for $87 per share, and the bonds sell for 118 percent of par.
A. The cost of common equity is 15.17 percent, preferred equity is 5.75 percent, and the debt's yield to maturity is 5.88. The company’s marginal tax rate is 40 percent.
B. Use the market values to calculate the firm's capital structure weights (debt, Preferred stock, equity).
If the company 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? Note: You don't need to convert the yield to maturity to an EAR.
Explanation / Answer
10.43%
Working:
a. Calculation of weight of component of Equity: Quantity Per unit Price Total Market Value Debt 1,75,000 $ 1,180 $ 20,65,00,000 Preferred Stock 3,30,000 $ 87 $ 2,87,10,000 Equity 89,00,000 $ 37 $ 32,93,00,000 Total $ 56,45,10,000 Weight of : Debt $ 20,65,00,000 / $ 56,45,10,000 = 0.366 Preferred Stock $ 2,87,10,000 / $ 56,45,10,000 = 0.051 Equity $ 32,93,00,000 / $ 56,45,10,000 = 0.583 Total 1.000 b. After tax yield to maturity = Before tax yield to maturity*(1-Tax Rate) = 5.88*(1-0.40) = 3.53 c. Calculation of Weighted Average cost of capital: Weight Cost(%) Weighted Cost (%) Debt 0.366 3.53 1.29 Preferred stock 0.051 5.75 0.29 Equity 0.583 15.17 8.85 Total 10.43 Thus, Weighted average cost of capital of 10.43 percent will be used as discount rate to evaluate cash flows from project.Related Questions
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