Titan Mining Corporation has 9.4 million shares of common stock outstanding and

Question

Titan Mining Corporation has 9.4 million shares of common stock outstanding and 380,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.2, 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 Titan Mining’s tax rate is 35 percent.

What is the firm's market value capital structure?

Debt :

Equity :

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?

Discount rate:

Titan Mining Corporation has 9.4 million shares of common stock outstanding and 380,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.2, 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 Titan Mining’s tax rate is 35 percent.

Explanation / Answer

Part A

Price of bond = par value x quote%

                                   = 1000 x 113%

                                   = 1,130

Market value weights = market value of source (amount)/ total amount

Source

Units

Price

Amount

Weight

Common Stock

9400000

42

394800000

0.4790

Bonds

380000

1130

429400000

0.5210

824200000

Equity = 0.4790

Debt = 0.5210

Part B

Cost of debt

FV= 1000

PV= 1130

N= 13x2 = 26

Pmt = 1000 x4%/ 2 = 20

We have following equation for before tax cost of debt

Annual rate = 1.2606% x 2 = 2.5212%

After tax cost of debt Kd = Rd x (1-t)

                                                = 2.5212% x (1-0.35)

                                                   = 1.64%

Cost of equity

Ke =Rf + MRP x beta

      = 0.03 + 0.082 x 1.20

      = 12.84%

Discount rate would be weighted average cost of capital (WACC):

WACC = ke x We + Kd x Wd

            = 0.1284 x 0.4790 + 0.0164 x 0.5210

                = 7.00%

Source

Units

Price

Amount

Weight

Common Stock

9400000

42

394800000

0.4790

Bonds

380000

1130

429400000

0.5210

824200000

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