Titan Mining Corporation has 8.6 million shares of common stock outstanding, 300

Question

Titan Mining Corporation has 8.6 million shares of common stock outstanding, 300,000 shares of 5 percent preferred stock outstanding, and 160,000 7.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.30, the preferred stock currently sells for $84 per share, 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 cost of debt and equity capital? (Enter as percent and do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)

Explanation / Answer

Cost of equity capital (CAPM) = Rf+×Rp

Rf is risk free return

is beta of the security

Rp is risk premium

= 3%+1.30×7.40%

= 12.62%

1 Face value (FV) $                                        1,000 2 Coupon rate 7.40% 3 Number of compounding periods per year                                                    2 1*2/3 Interest per period (PMT) $                                        37.00 Bond price (PV) $                               (1,150.00) 4 Number of years to maturity 15 5 = 4*3 Number of compounding periods till maturity (NPER)                                                  30 Bond yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond yield to maturity 5.88% (Pre-tax cost of debt) Bond Yield to maturity 3.53% (After-tax cost of debt) 5.88%*(1-40%)

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