Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250
ID: 2795719 • Letter: T
Question
Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and Titan Mining’s tax rate is 35 percent.
What is the firm’s market value capital structure? (Round your answers to 4 decimal places. (e.g., 32.1616))
What is the firm’s after tax cost of financing? (Round your answers to 4 decimal places. (e.g., 32.1616))
If Titan 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 2 decimal places. (e.g., 32.16))
a.What is the firm’s market value capital structure? (Round your answers to 4 decimal places. (e.g., 32.1616))
Explanation / Answer
Market Value of debt = 135,000 x 114% x 1000 = 153,900,000
Market Value of preferred stock = 250,000 x 91 = 22,750,000
Market Value of equity = 8,500,000 x 34 = 289,000,000
Total Value = 465,650,000
Weight of debt, wd = 153,900,000 / 465,650,000 = 33.0506%
wps = 4.8856%, we = 62.0638%
Cost of debt can be calculated using RATE function in excel or I/Y function on calculator
Cost of debt, kd = RATE(nper = 15*2, pmt = 7.5% x 1000 / 2, pv = -1140, fv = 1000) x 2 = 6.0654%
Cost of preferred stock, kps = 5 / 91 = 5.4945%
Cost of equity, ke = Rf + beta x MRP = 4% + 1.25 x 7.5% = 13.375%
WACC = wd x kd x (1 - tax) + wps x kps + we x ke
= 33% x 6% x (1 - 35%) + 5% x 5.5% + 62% x 13.4% = 9.8725% is the discount rate for the project.
Value Weight Cost Debt $ 153,900,000 33.0506% 6.0654% Pref. Stock $ 22,750,000 4.8856% 5.4945% Equity $ 289,000,000 62.0638% 13.3750% Total $ 465,650,000 WACC 9.8725%Related Questions
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