Copper Mountain Mining needs $12 million to finance the acquisition of mineral r

Question

Copper Mountain Mining needs $12 million to
finance the acquisition of mineral rights to some land in south central New Mexico and to
pay for some extensive surveys, core-borings, magnetic aerial surveys, and other types of
analyses designed to determine whether the mineral deposits on this land warrant development.
If the tests are favorable, the company will need an additional $12 million. Copper
Mountain Mining’s common stock is currently selling at $11, while the company is earning
approximately $1 per share. Other firms in the industry sell at from 8 to 13 times earnings.
Copper Mountain’s debt ratio is 30 percent, compared to an industry average of 35 percent.
Total assets at the last balance sheet date were $120 million.

Question: Debt or equity financing? Explain.

Explanation / Answer

Debt to capital = (D/E) /( 1 + (D/E)) = 0.30/1.30 = 0.2307

Weight of equity = 1 - weight of debt = 1 - 0.2307 = 0.7692

(a)

Amount of equity to be raised

= 12,000,000*7.69%

= 922,800

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