Titan Mining Corporation has 14 million shares of common stock outstanding, 900,
ID: 2701390 • 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?
14.59 percent 14.72 percent 15.17 percent 15.54 percent 16.88 percentExplanation / Answer
Common stock outstanding 14000000 9% preferred stock 900000 10% Bonds 220000 Face value 1000 MV of shares 42 Beta 1.15 Preferred stock 80 Maturity of bonds 17 Current price 91% Market risk premium 11.50% Risk free rate 7.50% tax rate 32% Calculating the market values Value Weight Debt 200200000 0.23274 Common stock 588000000 0.68356 Preffered stock 72000000 0.0837 860200000 Cost of debt 11% After tax cost 7.62% Cost of equity 20.73% Cost of preferred shares 11.25% WACC = 16.88%
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