Titan Mining Corporation has 10 million shares of common stock outstanding, 440,
ID: 2733518 • Letter: T
Question
Titan Mining Corporation has 10 million shares of common stock outstanding, 440,000 shares of 4 percent preferred stock outstanding, and 230,000 8.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $48 per share and has a beta of 1.50, the preferred stock currently sells for $98 per share, and the bonds have 10 years to maturity and sell for 115 percent of par. The market risk premium is 8.8 percent, T-bills are yielding 5 percent, and the company’s tax rate is 40 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.)
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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Titan Mining Corporation has 10 million shares of common stock outstanding, 440,000 shares of 4 percent preferred stock outstanding, and 230,000 8.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $48 per share and has a beta of 1.50, the preferred stock currently sells for $98 per share, and the bonds have 10 years to maturity and sell for 115 percent of par. The market risk premium is 8.8 percent, T-bills are yielding 5 percent, and the company’s tax rate is 40 percent.
Explanation / Answer
a)
Conclusion:-
b) Cost of debt = 4.4(NOTE 1) * (1 - 0.40) = 2.64 %
Cost of preferred stock = 4 %
Cost of equity = Risk free rate + Beta * market risk premium
= 5 + 1.5 * 8.8
= 18.20 %
Calculation of weighted average cost of capital:-
Weighted average cost of capital = 12.20 % (approx)
Conclusion:- The firm should use 12.20 % as a discount rate to discount the cash flows of project.
(NOTE 1):- Coupon rate on bond = 8.8 / 2 = 4.40 % (Semi-annual bond).
Particulars Total market value Market value weight Debt = 230000 * 1000 * 1.15 264500000 264500000 / 787620000 = 0.3358 Preferred stock= 440000 * 98 43120000 43120000 / 787620000 = 0.0547 Equity = 10000000 * 48 480000000 480000000 / 787620000 = 0.6095 Total 787620000 1Related Questions
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