Titan Mining Corporation has 8.8 million shares of common stock outstanding and

Question

Titan Mining Corporation has 8.8 million shares of common stock outstanding and 320,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.4, 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. 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.)

Explanation / Answer

MARKET VALUE OF COMMON STOCK

= 8800000 * $36

= $316800000

MARKET VALUE OF BOND

= 320000 * ($1000 * 117%)

= 320000 * $1170

= $374400000

TOTAL MARKET VALUE OF FIRM

= $316800000 + $374400000

= $691200000

B./

COST OF EQUITY

= Rf + BETA * MARKET RISK PREMIUM

= 5% + 1.4 * 7.6%

= 5% + 10.64%

= 15.64%

AFTER TAX COST OF DEBT

= ANNUAL COUPON * (1 - TAX RATE)

= 8% (1 - 0.38)

= 8% * 0.62

= 4.96%

WEIGHT OF EQUITY

= $316800000 / $691200000

= 0.4583 OR 45.83%

WEIGHT OF DEBT

= $374400000 / $691200000

= 0.5417 OR 54.17%

WACC = WEIGHT * COST OF EQUITY + WEIGHT * AFTER COST OF DEBT

= 0.4583 * 15.64% + 0.5417 * 4.96%

= 7.17% + 2.69%

= 9.86%

9.86% SHOULD BE USED TO DISCOUNT THE PROJECT CASH FLOW.

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