Question

In: Finance

Titan Mining Corporation has 6.1 million shares of common stock outstanding, 210,000 shares of 3.4 percent...

Titan Mining Corporation has 6.1 million shares of common stock outstanding, 210,000 shares of 3.4 percent preferred stock outstanding, and 95,000 bonds with a semiannual coupon rate of 5.1 percent outstanding, par value $1,000 each. The common stock currently sells for $75 per share and has a beta of 1.05, the preferred stock has a par value of $100 and currently sells for $81 per share, and the bonds have 15 years to maturity and sell for 105 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 2.8 percent, and the company’s tax rate is 21 percent. a. What is the firm’s market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) 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? (

Solutions

Expert Solution

1)

Market value of common stock = 6,100,000 * 75 = 457,500,000

Market value of preferred stock = 210,000 * 81 = 17,010,000

Market value of bonds = 95,000 * (1.05 * 1,000) = 99,750,000

Total market value = 457,500,000 + 17,010,000 + 99,750,000 = 574,260,000

Weight of common stock = 457,500,000 / 574,260,000 = 0.7967

Weight of preferred stock = 17,010,000 / 574,260,000 = 0.0296

Weight of bonds = 99,750,000 / 574,260,000 = 0.1737

2)

Coupon = (0.051 * 1000) / 2 =25.5

Number of periods = 15 * 2 = 30

Price = 1.05 * 1000 = 1050

YTM = 4.6338%

Keys to use in a financial calculator: 2nd I/Y 2, FV 1000, PV -1050, PMT 25.5, N 30, CPT I/Y

Preferred dividend = 0.034 * 100 = 3.4

Cost of preferred stock = (Preferred dividend / price)* 100

Cost of preferred stock = (3.4 / 81)* 100

Cost of preferred stock = 4.1975%

Cost of equity = Risk free rate + beta (market risk premium)

Cost of equity = 2.8% + 1.05 (6.8%)

Cost of equity = 9.94%

WACC = 0.7967*0.0994 + 0.0296*0.041975 + 0.1737*0.046338*(1 - 0.21)

WACC = 0.079192 + 0.001242 + 0.006359

WACC = 0.0868 or 8.68%

Rate should the firm should use is 8.68%


Related Solutions

Titan Mining Corporation has 9.9 million shares of common stock outstanding, 430,000 shares of 6.1 percent...
Titan Mining Corporation has 9.9 million shares of common stock outstanding, 430,000 shares of 6.1 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $47 per share and has a beta of 1.15; the bonds have 20 years to maturity and sell for 118 percent of par. The market risk premium is 8.7 percent, T-bills are yielding 5 percent, and the company’s tax rate is 24 percent. a. What is the firm’s market value capital...
Titan Mining Corporation has 6.2 million shares of common stock outstanding, 215,000 shares of 3.5 percent...
Titan Mining Corporation has 6.2 million shares of common stock outstanding, 215,000 shares of 3.5 percent preferred stock outstanding, and 100,000 bonds with a semiannual coupon rate of 5.2 percent outstanding, par value $1,000 each. The common stock currently sells for $74 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $82 per share, and the bonds have 16 years to maturity and sell for 106 percent of...
titan mining corporation has 14 million shares of common stock outstanding 900,000 shares of 9 percent...
titan mining corporation has 14 million shares of common stock outstanding 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sell for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, T-bills are yielding 7.5...
Titan Mining Corporation has 9.9 million shares of common stock outstanding, 430,000 shares of 6 percent...
Titan Mining Corporation has 9.9 million shares of common stock outstanding, 430,000 shares of 6 percent preferred stock outstanding, and 225,000 8.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $47 per share and has a beta of 1.45, the preferred stock currently sells for $97 per share, and the bonds have 20 years to maturity and sell for 118 percent of par. The market risk premium is 8.7 percent, T-bills are yielding 5...
Titan Mining Corporation has 7.3 million shares of common stock outstanding, 265,000 shares of 4.5 percent...
Titan Mining Corporation has 7.3 million shares of common stock outstanding, 265,000 shares of 4.5 percent preferred stock outstanding, and 150,000 bonds with a coupon rate of 5.4 percent outstanding, par value $1,000 each. The common stock currently sells for $64 per share and has a beta of 1.20. The preferred stock has a par value of $100 and currently sells for $92 per share. The bonds have 16 years to maturity, pay semiannual coupons, and sell for 106 percent...
Titan Mining Corporation has 7.8 million shares of common stock outstanding, 290,000 shares of 4.3 percent...
Titan Mining Corporation has 7.8 million shares of common stock outstanding, 290,000 shares of 4.3 percent preferred stock outstanding, and 175,000 bonds with a semiannual coupon rate of 5.9 percent outstanding, par value $2,000 each. The common stock currently sells for $59 per share and has a beta of 1.05, the preferred stock has a par value of $100 and currently sells for $97 per share, and the bonds have 16 years to maturity and sell for 103 percent of...
Titan Mining Corporation has 9.5 million shares of common stock outstanding, 390,000 shares of 5 percent...
Titan Mining Corporation has 9.5 million shares of common stock outstanding, 390,000 shares of 5 percent preferred stock outstanding, and 205,000 8.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $43 per share and has a beta of 1.25, the preferred stock currently sells for $93 per share, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 8.3 percent, T-bills are yielding 4...
Titan Mining Corporation has 9 million shares of common stock outstanding, 340,000 shares of 6 percent...
Titan Mining Corporation has 9 million shares of common stock outstanding, 340,000 shares of 6 percent preferred stock outstanding, and 180,000 7.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $38 per share and has a beta of 1.50, the preferred stock currently sells for $88 per share, and the bonds have 20 years to maturity and sell for 119 percent of par. The market risk premium is 7.8 percent, T-bills are yielding 3...
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent...
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.40, the preferred stock currently sells for $86 per share, and the bonds have 10 years to maturity and sell for 117 percent of par. The market risk premium is 7.6 percent, T-bills are yielding 5...
Titan Mining Corporation has 9.9 million shares of common stock outstanding, 430,000 shares of 6 percent...
Titan Mining Corporation has 9.9 million shares of common stock outstanding, 430,000 shares of 6 percent preferred stock outstanding, and 225,000 8.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $47 per share and has a beta of 1.45, the preferred stock currently sells for $97 per share, and the bonds have 20 years to maturity and sell for 118 percent of par. The market risk premium is 8.7 percent, T-bills are yielding 5...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT