Titan Mining Corporation has 9.4 million shares of common stock outstanding, 380
ID: 2716933 • Letter: T
Question
Titan Mining Corporation has 9.4 million shares of common stock outstanding, 380,000 shares of 4 percent preferred stock outstanding, and 200,000 8.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.20, the preferred stock currently sells for $92 per share, and the bonds have 10 years to maturity and sell for 113 percent of par. The market risk premium is 8.2 percent, T-bills are yielding 3 percent, and the company’s tax rate is 35 percent.
What is the firm’s market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)
If the company 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Titan Mining Corporation has 9.4 million shares of common stock outstanding, 380,000 shares of 4 percent preferred stock outstanding, and 200,000 8.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.20, the preferred stock currently sells for $92 per share, and the bonds have 10 years to maturity and sell for 113 percent of par. The market risk premium is 8.2 percent, T-bills are yielding 3 percent, and the company’s tax rate is 35 percent.
Explanation / Answer
Solution: a. What is the firm’s market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.) MVD = 200,000($1,000)(1.13) = $226M; MVE = 9.4M($42) = $395M MVP = 380,000($92) = $34.96M; V = $226M + 395M + 34.96M = $655.96M D/V = 226/655.96 = 0.344533 P/V = 34.96/655.96 = 0.053296 E/V = 395/655.96 = 0.602171 Market value weight Debt 0.3445 Preferred stock 0.0533 Equity 0.6022 b. If the company 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) RE = .04 + 1.20(.082) = 13.84% P0 = $910 = $45(PVIFAR%,30) + $1,000(PVIFR%,30); R = 5.0916%, YTM = 10.1832% RD = (1 – .35)(.101832) = 6.6191% RP = $4/$92 = 4.35% WACC = .1384(.6022) + .0435(.0533) + .066191(.3445) = 10.84% 0.1384(0.6022) = 0.0833 0.0435(0.0533) = 0.0023 0.066191(0.3445) = 0.0228 Total in % = 10.84% 0.1084
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