Raymond Mining Corporation has 9.7 million shares of common stock outstanding, 4

Question

Raymond Mining Corporation has 9.7 million shares of common stock outstanding, 410,000 shares of4 dollar preferred stock outstanding, and 167,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $45 per share and has a beta of 1.35, the preferred stock currently sells for $94 per share, and the bonds have 10 years to maturity and sell for 116 percent of par. The market risk premium is 8.5 percent, T-bills are yielding 5 percent, and Adex Mining's tax rate is 35 percent. a. What is the firm's market value capital structure? (Round your final answers to 4 decimal places. (e.g., 32.1616) Market value Debt Preferred stock Equity b. If Raymond Mining 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 round your final answer to 3 decimal places. (e.g., 32.161) Discount rate

Explanation / Answer

Market Value of Equity=9.7*45=436.5 million
Market Value of Preferred Stock=410000*94=38540000=38.54 million
Market Value of Bond=167000*116%*1000=193720000=193.72 milliom

cost of equity=risk free+beta*market risk premium=5%+1.35*8.5%=16.475%

Ytm of bonds=5.41%
cost of debt=5.41%
after-tax cost of debt=5.41%*(1-35%)=3.5165%

cost of preferred stock=4%

Discount rate or WACC=(193.72*3.5165%+38.54*4%+436.5*16.475%)/(436.5+38.54+193.72)=12.0024%

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