Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320
ID: 2750588 • Letter: T
Question
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.40, the preferred stock currently sells for $86 per share, 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. Round your answers to 4 decimal places, e.g., 32.1616.)
(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?
Please illustrate working clearly and be precise in calculations and answers.
Explanation / Answer
a) Market value of equity = price* number of shares = 8.8*36 = 316.8m
Market value of prefered equity = price* number of shares = 320000*86 = 27.52m
Market value of debt = number of bonds*par value* price in terms of par = 170000*1000*1.17 = 198.9m
Market value of firm = Market value of equity+Market value of prefered equity+Market value of debt
= 316.8+27.52+198.9 = 543.22m
b)
Cost of equity = risk-free rate + beta * (market risk premium) = 5+1.4*7.6 = 15.64%
Cost of preferred equity = payment on prefered stock/current price = 4/86 = 4.651%
Cost of debt =
K =Nx2
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^(Nx2)
k=1
K= 10x2
1170= [(7.6*1000/(100*2))/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^10x2
k=1
cost of debt(YTM) = 5.379%
WACC
=
E
×
re
+
D
×
(1 t)
×
rd
+
P
×
rp
(E+D+P)
(E+D+P)
(E+D+P)
Where:
E
=
Market value of equity
D
=
Market value of debt
P
=
Market value of preferred stock
re
=
Cost of equity
rd
=
Cost of debt
rp
=
Cost of preferred stock
t
=
Marginal tax rate
= 316.8/543.22*15.64+198.9/543.22*5.379*(1-0.38)+27.52/543.22*4.651 = 10.5778%
WACC
=
E
×
re
+
D
×
(1 t)
×
rd
+
P
×
rp
(E+D+P)
(E+D+P)
(E+D+P)
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