Titan Mining Corporation has 9.2 million shares of common stock outstanding and

Question

Titan Mining Corporation has 9.2 million shares of common stock outstanding and 360,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $40 per share and has a beta of 1.6, and the bonds have 15 years to maturity and sell for 111 percent of par. The market risk premium is 8 percent, T-bills are yielding 5 percent, and the company’s tax rate is 40 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

EQUITY

Beta
1.6
Market risk premium
8%
T-bill yield
5%
Cost of equity = T -bill yield + beta x market risk premium
Cost of equity = 5% + 1.6 x 8%
Cost of equity =17.80%

Cost debt=5%

cost of debt after tax=5%(1-0.4)=3%

Common stock Market value=9,200,000*$40=$368,000,000

Debt =360,000*$1,000=$360,000,000

firm's market value capital structure and rate should the firm use to discount the project's cash flows

firm's market value capital structure:

Common stock=$368 Million

Debt=$360 Million (Every time when we are going to calculate capital structure we consider only book value of debt not market value of debt.because book value is only our liability.

Weight of Equity=0.51

Weight of debt=0.49

rate should the firm use to discount the project's cash flows=10.48%

Particulars After Tax Cost of Capital Market Value Prop-ortion WACC Equity Shares      17.80     368.00        0.51        9.00 Debt        3.00     360.00        0.49        1.48 Total     728.00        1.00      10.48

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