Titan Mining Corporation has 14 million shares of common stock outstanding, 900,
ID: 2697340 • Letter: T
Question
Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 220,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm's tax rate is 32 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project?
Explanation / Answer
Total Assets = Equity + Debt + Pref stock
= 14000000*$42 + 220000*1000*0.91 + 900000*$80 = $860,200,000
We = Wt of EQUity = E/TA = 14000000*$42/$860,200,000
= 0.68
Wd = 220000*1000*0.91 /$860,200,000 = 0.23
Wp = 900000*$80/$860,200,000
= 0.09
Debt: 220,000 10% Semi bonds outstanding, $1,000 par value, 17 years to maturity, selling for 91 percent of par; the bonds make semiannual payments
So COupon = 10% Semiannual. So PMT = 10%*1000/2 = 50
nper = 17Yr* 2 perios/Yr = 34
PV = 91%*1000 = 910, FV = 1000
SO Rate Kd = 2*Rate(nper,pmt,pv,fv)
= 2*Rate(34,50,-910,1000) =11.20%
Retur on Equity Ks = Krf + beta*MRP = 7.5%+1.15*11.5% =20.73%
Ret on Pref Stock Kp = DIv/Price = (9%*100)/80 = 11.25%
We have
WACC (Ka)= Wd*(Kd)*(1-t)+(Wp)*(Kp) +(We)*(Ke)
where Wd= The proportion of the financing taken on by debt=23%
Wp= The proportion of the financing taken provided by preferred stock=9%
We= The proportion of the financing provided by equity=68%
Kp= 11.25%
Ke =20.73%
Kd = 11.20%
T= 32%
And WACC (Ka) = Wd*(Kd)*(1-t)+(Wp)*(Kp) +(We)*(Ke)
ie wacc = 23%*11.20%*(1-32%) + 9%*11.25% + 68%*20.73% = 16.86%
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