Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250

Question

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 to 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

Explanation / Answer

(a) We will begin by nding the market value of each type of nancing. We nd:

MVD = 120,000 x 1,000 x 0.93 = $111.6M

MVE = 9M x 34 = $306M

MVP = 500,000 x 83 = $41.5M

And the total market value of the rm is:

V = 111.6M + 306M + 41.5M = $459.1M

2So, the market value weights of the companys nancing is:

D/V = 111.6M/459.1M = .2431

P/V = 41.5M/459.1M = .0904

E/V = 306M/459.1M = .6665

(b) For projects equally as risky as the rm itself, the WACC should be used as the

discount rate.

First we can nd the cost of equity using the CAPM. The cost of equity is .05

+ 1.20 x 10 = 17.00%.

The cost of debt is the YTM of the bonds. Using your calculator with PV =

930, pmt=42.5, n=30, fv=1000, solve for r. We get 4.69%. Double this to get

an annual rate of 9.38%. The aftertax cost of debt is 9.38 x .65 = 6.10%.

The cost of preferred stock is 7/83 = .0843 or 8.43%.

Now we can calculate the WACC as:

WACC = .1700 x .6665 + .0843 x .0904 + .0610 x .2431

= 13.58%

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