****I AM TRYING THIS AGAIN!!!! THE LAST TUTOR SENT ME AN ANSWER THAT HAD NOTHING

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****I AM TRYING THIS AGAIN!!!! THE LAST TUTOR SENT ME AN ANSWER THAT HAD NOTHING TO DO WITH THE PROBLEM BELOW*****, PLEASE PAY ATTENTION, THIS IS USING MY QUESTIONS.

Titan Mining Corporation has 9.4 million shares of common stock outstanding and 380,000 4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.2, and the bonds have 10 years to maturity and sell for 113 percent of par. The market risk premium is 8.2 percent, T-bills are yielding 3 percent, and the company’s tax rate is 35 percent.

a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

               Weight

Debt

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? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Discount rate in percentage

Explanation / Answer

(a)

Market value of common stock = 9.4 million x $42 = $394.8 million

Market value of bonds = 380,000 x $1,000 x (113/100) = $429.4 million

Weight of debt = 394.8 / (394.8 + 429.4) = 394.8 / 824.2 = 0.4790

Weight of equity = 1 - 0.479 = 0.5210

(b)

If

C: Annual coupon payment = 380,000 x 4% x $1,000 = $15.2 million

F: Face value = 380,000 x $1,000 = $380 million

P: Current price = $380 million x (113/100) = $429.4 million

N: Years to maturity = 10, Then

YTM = [C + (F - P) / N] / [(F + P) / 2]

= [15.2 + (380 - 429.4) / 10] / [(380 + 429.4) / 2]

= [15.2 - (49.4 / 10)] / 404.7

= [15.2 - 4.94] / 404.7 = 40.26 / 404.7 = 0.0995 = 9.95%

This is pre-tax cost of debt.

After tax cost of debt, Kd = pre-tax cost of debt x (1 - tax rate) = 9.95% x (1 - 0.35) = 9.95% x 0.65

= 6.47%

Cost of equity, Ke = Risk-free (T-Bill) rate + Beta x Market risk premium

= 3% + 1.2 x 8.2% = 3% + 9.84%

= 12.84%

Discount rate = Proportion of debt x Kd + proportion of equity x Ke

= 0.4790 x 6.47% + 0.521 x 12.84% = 3.0991% + 6.6896%

= 9.79%

NOTE: Actual result may slightly vary because Bond YTM is computed manually using the approximation method, without use of Excel of financial calculator.

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