Titan Mining Corporation has 8.9 million shares of common stock outstanding and

Question

Titan Mining Corporation has 8.9 million shares of common stock outstanding and 330,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $37 per share and has a beta of 1.45, and the bonds have 15 years to maturity and sell for 118 percent of par. The market risk premium is 7.7 percent, T-bills are yielding 4 percent, and Titan Mining’s tax rate is 40 percent.
  
a.   What is the firm's market value capital structure? (Do not round intermediate calculations and round your final answers to 4 decimal places.

b.   If Titan Mining is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?

Explanation / Answer

A.The market value of firm is value of equity + Value of debt.

Value of equity is 8.9 million × 37 = 329.3 million.

Value of debt is , 330,000 × 1180 = 389.4 million, i.e no.of bonds × market value

Value of firm is 329.3 million + 389.4 million = 718.7 million.

B.cost of equity is Rf + beta×risk premium = 4% + 1.45×7.7% = 15.165%

Cost of debt i.e yield is 3.452 %, post tax rate is 3.452%×0.6 = 2.07%

WACC is % equity × cost of equity + % debt × cost of debt = 15.165% × 45.82% + 2.07% × 54.18

= 6.95% + 1.12%= 8.07%

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