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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? (

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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%

jeff jeffy answered 6 months ago
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