Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330
ID: 2718199 • Letter: T
Question
Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of 5 percent preferred stock outstanding, and 175,000 7.7 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, the preferred stock currently sells for $87 per share, 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 the company’s tax rate is 40 percent.
What is the firm’s market value capital structure?
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?
Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of 5 percent preferred stock outstanding, and 175,000 7.7 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, the preferred stock currently sells for $87 per share, 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 the company’s tax rate is 40 percent.
What is the firm’s market value capital structure?
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?
Explanation / Answer
Total Common Equity Value= 8.9*10^6*37
=329300000
Total Prefered stock value=28710000=330000*87
Total market Value of Debt =1.18*1000*175000=206500000
Total Value=329300000+28710000+206500000=564510000
Now Weights are calculated as a percentage of total value
Equity Preferd stock debt %
58.33% 5.09% 36.58%
Ke=4%+1.45*7.7%=15.165%
WACC = (wd)(kd)(1-t) + (wps)(kps) + (wce)(kce)
=0.3658*0.077*(1-0.4)+0.0509* 0.05+0.5833*.15165
=10.79%
This is a appropriate discount rate.
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