Calculate the market value capital structure and WACC. Titan Mining Corporation

Question

Calculate the market value capital structure and WACC.

Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and Titan Mining's tax rate is 35 percent.

Debt
Bonds Outstanding - 135,000
Settlement Date - 01/01/00
Maturity Date - 01/01/15
Annual Coupon Rate - 7.50%
Coupons per year - 2
Bond price (% of par) - 114
Par value ($) - $1,000

Common Stock
Shares Outstanding - 8,500,000
Beta - 1.25
Share price - $34

Preferred Stock Outstanding
Shares outstanding - 250,000
Coupon rate - 5.00%
Share price - $91
Par value ($) - $100

Market
Market risk premium - 7.50%
Risk-free rate - 4.00%
Tax rate - 35%

What is the firm's market value capital structure?

Market value of debt
Market value of equity
Market value of preferred
Market value of firm

Weight of debt
Weight of equity
Weight of preferred

What is the firm's weighted average cost of capital, or WACC?

Pretax cost of debt
Aftertax cost of debt

Cost of equity

Cost of preferred

WACC

Explanation / Answer

Market value capital structure

Market value of debt =135000*114%*1000=153900000

Market value of equity=8,500,000*$34=$289000000

Market value of preferred=250000*$91=$22750000

Market value of firm=Sum of above= 465650000

Weight of debt= 153900000/465650000=62.06%
Weight of equity= 289000000/465650000= 4.89%
Weight of preferred=22750000 /465650000=33.05%

WACC:

Pretax cost of debt=YTM of bonds

PV= 114%*1000= 1140

FV= 1000

Coupon= PMT= 7.5%*1000/2 = 37.5

N=15*2= 30

Using financial calculator,

I/Y= 3.03%

Pretax cost= 3.03%*2 = 6.06%
Aftertax cost of debt = 6.06%*(1-Tax)

= 3.94%

Cost of equity= Rf+ Beta*Rp

= 4%+ 1.25*7.5%

= 13.375%

Cost of preferred= 5%*100/91 =5.49%

WACC=3.94%*62.06%+ 13.375%*4.88%+ 5.49%*33.05%

=4.91%

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