Titan Mining Corporation has 8.3 million shares of common stock outstanding, 270

Question

Titan Mining Corporation has 8.3 million shares of common stock outstanding, 270,000 shares of 5 percent preferred stock outstanding, and 145,000 7.1 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $31 per share and has a beta of 1.15, the preferred stock currently sells for $81 per share, and the bonds have 15 years to maturity and sell for 112 percent of par. The market risk premium is 7.1 percent, T-bills are yielding 4 percent, and the company’s tax rate is 30 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.) Market value weight Debt Preferred stock 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?

Explanation / Answer

Workings

Market Value Market value weight Cost of Capital Bond 145000*1000*1.12 162400000 36.78% 4.12% 1.51% Equity 8.3*1000000*31 257300000 58.27% 12.17% 7.09% preferred stock 270000*81 21870000 4.95% 7.41% 0.37% Total 441570000 WACC 8.97%

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