Titan Mining Corporation has 9.6 million shares of common stock outstanding, 400

Question

Titan Mining Corporation has 9.6 million shares of common stock outstanding, 400,000 shares of 6 percent preferred stock outstanding, and 210,000 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $44 per share and has a beta of 1.30, the preferred stock currently sells for $94 per share, and the bonds have 20 years to maturity and sell for 115 percent of par. The market risk premium is 8.4 percent, T-bills are yielding 4 percent, and the company’s tax rate is 40 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.)

No Excel solutions please.

Titan Mining Corporation has 9.6 million shares of common stock outstanding, 400,000 shares of 6 percent preferred stock outstanding, and 210,000 8.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $44 per share and has a beta of 1.30, the preferred stock currently sells for $94 per share, and the bonds have 20 years to maturity and sell for 115 percent of par. The market risk premium is 8.4 percent, T-bills are yielding 4 percent, and the company’s tax rate is 40 percent.

Explanation / Answer

1) The market value weights are as follows:

Equity = 9600000 * 44 / 701500000 = 60.2138 %

Debt = 210000 * 1150 / 701500000 = 34.4262 %

Preferres = 400000 * 94 / 701500000 = 5.3599

Note that 701500000 = 9600000 * 44 + 210000 * 1150 + 400000 * 94

2) We need to calculate the WACC

Cost of Equity = 4% + 1.3*8.4% = 14.92%

Cost of Debt = 8.4 % * ( 1-0.4) = 5.04%

Cost of Preferred = (100 * 6% )/ 94 = 6/94 = 6.38%

Thus Wacc = (14.92% * 60.2138%) + (5.04% * 34.4262% )+ (6.38% * 5.3599% )= 11.06%

Please change the rating if you are satisfied now and leave a comment in case of any confusion.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.