Titan Mining Corporation has 8.5 million shares of common stock outstanding and

Question

Titan Mining Corporation has 8.5 million shares of common stock outstanding and 250,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.25, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and the company’s tax rate is 35 percent.

a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.) Weight Debt Equity

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 and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate %

Explanation / Answer

a)Firm's market value capital structure =8.5*$1000000 *$34+250,000*$1000*114%=$574,000,000

b)rate should be used to discount the project's cash flows is Weighted aveage cost of capital

Cost of equity by using CAPM model

Cost of equity =Risk free rate + beta of equity *mrket premium

Cost of equity=4%+1.25*7.5%=13.38%

Cost of debt after tax =5%(1-.35) =3.25%

Weights of each one

Then WACC =13.38*0.503+3.25*0.497 =8.35%

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