Titan Mining Corporation has 8.3 million shares of common stock outstanding, 270
ID: 2760713 • Letter: T
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.
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 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.
Explanation / Answer
a. Market Value of debt = 145,000 * 1000* 1.12 = $162,400,000
Market Value of equity = 8,300,000 * 31 = $257,300,000
Market Value of preferred share = 270,000 * 81 = $21,870,000
Total market Value = $162,400,000 + $257,300,000 + $21,870,000 = $441,570,000
Market value weight of debt = 162,400,000/441,570,000 = 0.3678
Market Value weight of equity = 257,300,000 /441,570,000 = 0.5827
Market Value weight of preferred share = 1 -0.3678 -0.5827 = 0.0495
b.Cost of equity as per CAPM = Re = Rf + beta * Market risk premium = 4 + 1.15*7,1 = 12.165%
Pre tax cost of debt = YTM =rate(nper,pmt,pv,fv) where nper = 15*2 = 30 periods (semi-annual), pmt = 7.1% of 1000 = 71 and semiannual coupon= 71/2 = 35.5 , pv = 1120 and fv =1000
Annual YTM = rate(nper,pmt,pv,fv) *2 = 5.885%
After tax cost of debt = Rd = 5.885*(1-0.30) = 4.1195%
Cost of preferred shares = Rpf = Dividend/ Price = 5/81 = 6.173%
Hence WACC = Market value weight of debt * Rd + Market value weight of equity * Re + Market value weight of preferred stock * Rpf
WACC = 0.3678 * 4.1195% + 0.5827 * 12.165% + 0.0495 *6.173% = 8.91%
Hence discount rate = 8.91%
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