Question

Raymond Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of 5% $100 par value preferred stock outstanding, and 151,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $37 per share and has a beta of 1.45, the preferred stock currently sells for $93 per share, and the bonds have 15 years to maturity and sell for 118% of par. The market risk premium is 7.7%, T-bills are yielding 4%, and Raymond Mining’s tax is 40%.

a. What is the firm’s market value capital structure? (Enter your answers in whole dollars.)

	Market value
Debt	$
Equity	$
Preferred stock	$

b. If Raymond 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. Enter your answer as a percentage rounded to 3 decimal places.)

Discount rate              %

Answer 1

Market Values

Equity = No of Shares * Market Price per Share

= 8.9 million * 37

=$ 329.3 Million

Debt = value of debt can be calculated by discounting present value of cashflows

$ in millions

Year	Discount Factor	Cashflow	Discounted Cash flow
1 to 15	13.99	3.3975	47.5263
15	0.0597	178.18	10.6344
Present Value of Cash flows	58.1607

In excel Discout Factor Annuity = PV (5.85%,30,-1)

Here Market rate = 11.7%/2 = 5.85%

No of periods = 15*2 = 30

Discount Factor for 15 th year = 1/ (1.117)^15

Cash flow Net of tax = (150*7.5%*0.6)/2=3.3975

So the debt Value = $ 58.1607 millions

c . Preferred stock Value

330000*93 = $ 30690000

ii)If Raymond Mining is evaluating a new investment project that has the same risk as the firm’s typical project, the rate should the firm use to discount the project’s cash flows is cost of equity

Risk Premium =7.7%

Risk free Rate = 4%

Market Rate = 11.7%

Calculation of Cost of equity = Risk free rate + beta * Risk premium

= 4%+ 1.45*7.7%

= 15.17%