Finding the WACC Titan Mining Corporation has 8.7 million shares of common stock
ID: 2781486 • Letter: F
Question
Finding the WACC Titan Mining Corporation has 8.7 million shares of common stock outstanding and 230,000 6.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $37 per share and has a beta of 1.20, and the bonds have 20 years to maturity and sell for 104 percent of par. The market risk premium is 7 percent, T-bills are yielding 3.5 percent, and the company's tax rate is 35 percent. (Hint: 1) find the market value weight info; 2) find the component costs of capital for common stock and bond; 3) use the WACC formula.] 4. What is the firm's market value capital structure? (i.e, market value weight for each of the two sources of external financing) a. 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
Cost of equity : Rf+[beta*MP]
= 3.5 +[1.2*7]
= 3.5 + 8.4
= 11.9%
**Price= 1000*104%=1040
semiannual interest =1000*.064*6/12= 32
semiannual months =20*2=40
Yield on bonds = Semiannual interest+[(face value-price)/semiannual months ]/[(face value +price)/2]
=32+[(1000-1040)/40]/[(1000+1040)/2]
= [32+ (-40/40)]/[2040/2]
=[32 - 1]/1020
= .0303 or 3.03 % semiannually or (3.03*2)= 6.06% annually
**two semiannual months in a year
After tax cost of debt = 6.06(1-.35)= 3.94%
a)
b)WACC=[ AFter tax cost of debt *Wd]+[cost of equity *We]
=[3.94*.4263]+[11.9*.5737]
= 1.68+ 6.83
= 8.51%
Discount rate to use : 8.51%
market value market value weights Bond 230000*1040=239,200,000 239200000/561100000= .4263 Equity 8,700,000*37 = 321,900,000 321900000/561100000= .5737 561,100,000Related Questions
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