Titan Mining Corporation has 8.6 million shares of common stock outstanding and
ID: 2734509 • Letter: T
Question
Titan Mining Corporation has 8.6 million shares of common stock outstanding and 300,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.3, and the bonds have 15 years to maturity and sell for 115 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3 percent, and the company’s tax rate is 40 percent.
What is the firm's market value capital structure?
Weight
Debt
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?discount rate
Titan Mining Corporation has 8.6 million shares of common stock outstanding and 300,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.3, and the bonds have 15 years to maturity and sell for 115 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3 percent, and the company’s tax rate is 40 percent.
Explanation / Answer
a.
Compute the firm's market value capital structure:
Source of capital
Amount $
Weight
Common stock (8.6 million*$34)
$ 292,400,000
0.49
Bonds (300,000 * $1,000)
$ 300,000,000
0.51
$ 592,400,000
1.00
Therefore, weight of Equity and debt are 49% and 51% respectively.
b.
Compute the rate should the firm use to discount the project's cash flows:
Let us use the CAPM return (discount) to compute the discount rate as follows.
CAPM return = Rf + (Rp) ×
= 3% + 7.4% × 1.3
= 12.62%
Therefore, the discount rate that should use is 12.62%.
Source of capital
Amount $
Weight
Common stock (8.6 million*$34)
$ 292,400,000
0.49
Bonds (300,000 * $1,000)
$ 300,000,000
0.51
$ 592,400,000
1.00
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