Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320
ID: 2730486 • Letter: T
Question
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.40, the preferred stock currently sells for $86 per share, and the bonds have 10 years to maturity and sell for 117 percent of par. The market risk premium is 7.6 percent, T-bills are yielding 5 percent, and the company’s tax rate is 38 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.)
Equity
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?
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.)
Explanation / Answer
Market value no of units market price per unit total market value A value of debt 170000 1170 198900000 B value of preferred stock 320000 86 27520000 C value of equity 8800000 36 316800000 Market value of firm 543220000 cost of debt (interest/market value)*(1-tax rate) 0.0649573 4.02735 cost of preferred stock preferece dividend/market price 0.0465116 4.651163 cost of equity irf + (rm-irf)*beta 15.64 15.64 Weighted average cost of capital Market value no of units weight cost weight * cost A value of debt 170000 1170 198900000 0.36615 4.02735 1.474614 B value of preferred stock 320000 86 27520000 0.0506609 4.651163 0.235632 C value of equity 8800000 36 316800000 0.5831891 15.64 9.121078 Market value of firm 543220000 weighted average cost of capital 10.83132 percent discount rate of evaluate the project would be 10.83%
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