Question

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 percent, and the company’s tax rate is 36 percent.

a. What is the firm’s market value capital structure? Debt, Preferred Stock, and Equity. (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)

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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a)

Market value of preferred equity = 390000 * 93 = 36,270,000

Market value of equity = 9500000 * 43 = 408,500,000

Market value of debt = 205000 * 1140 = 233,700,000

Total market value = 678,470,000

b)

Cost of equtiy, r_e = risk free rate + beta( return from market - risk free rate)

Cost of equtiy, r_e = 0.04 + 1.25( 0.083 - 0.04)

Cost of equtiy, r_e = 9.3750%

Cost pf preferred stock, r_p = 5 / 93 = 5.3763%

Cost of debt = 6.7969 ( 1 - 0.36)

To get 6.7969, keys to use in financial calculator are 2nd I/Y P/Y = 2, PV = -1140, FV = 1000, PMT = 41.5, N = 30, CPT I/Y)

Cost of debt= 4.35%

Weighted average cost of capital, WACC = Rd * Wd + Re * We + Rp * Wp

Weighted average cost of capital, WACC = [(0.0435 * (233,700,000 / 678,470,000)] + [(0.093750 * ( 408,500,000 / 678,470,000)] + [(0.053763 * (36,270,000 / 678,470,000)]

Weighted average cost of capital, WACC = 0.01498 + 0.05644 + 0.002874

Weighted average cost of capital, WACC = 0.074294 or 7.4294%