Question

1. Titan Mining Corporation has 8 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 100,000 units of 9 percent semiannual bonds outstanding, par value $1,000 each. The preferred stock pays a dividend of $6 per share. The common stock currently sells for $32 per share and has a beta of 1.15, the preferred stock currently sells for $67 per share, and the bonds have 15 years to maturity and sell for 91 percent of par. The market risk premium is 10 percent, T-bills are yielding 5 percent, and Titan Mining’s tax rate is 35 percent.

1. What is the firm’s market value capital structure?
2. 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?

1. Takelmer Industries has a different WACC for each of three types of projects. Low-risk projects have an 8% WACC, average-risk projects a 10% WACC, and high-risk projects a 12% WACC. Which of the following projects do you recommend that the firm accept?

Project	Level of Risk	IRR
A	Low	9.50%
B	Average	8.50%
C	Average	7.50%
D	Low	9.50%
E	High	14.50%
F	High	17.50%
G	Average	11.50%

1. A, B, C, D, and G
2. B, C, E, F, and G
3. A, D, E, F, and G
4. A, B, C, D, E, F, and G

Answer 1

a. Market Value of Preferred Stock =Price of Preferred Stock*Number of preferred stocks =67*5000000=335,000,000
Market Value of Equity =Price of Equity*Number of stocks =32*8000000=256,000,000
Market Value of Debt =Number of units*Par Value*91% =100000*1000*91% =91,000,000
Total Value =335,000,000+256,000,000+91,000,000 =682,000,000

b. Cost of Preferred Stock =Dividend/Price of Preferred Stock =6/67 =8.9552%
Cost of Equity =Risk free Rate+Beta*(Market Return-Risk Free Rate) =5%+1.15*10% =16.50%
Price of Bond=91%*1000 =910
Par Value =1000
Coupon =9%*1000/2 =45
Number of Periods=15*2=30
Cost of Debt using rate function of excel =2*RATE(30,45,-910,1000) =10.1832%
Discount rate =Weight of Preferred Stock*Cost of Preferred Stock+Weight of Equity*Cost of Equity+Weight of Debt*Cost of Debt =335,000,000/682,000,000*8.9552%+256,000,000/682,000,000*16.50%+91,000,000/682,000,000*10.1832%*(1-35%)
=11.95%

2, Option c. ADEFG is correct option because in these cases IRR is greater than cost of capital. IF IRR is greater than cost of capital it should be accepted.