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Titan Mining Corp. has 8.5 million shares of common stock and 135,000 bonds outstanding. The common...

Titan Mining Corp. has 8.5 million shares of common stock and 135,000 bonds outstanding. The common stock is selling for $34 per share and the estimated cost of equity is 13.4%. The bonds, currently selling for 114% of par, are BB-rated with 10 years to maturity. Similar risk bonds are trading at a default spread of 2.06%. The yield on T-bonds is 4%. Titan Mining’s corporate tax rate is 35 percent. What is Titan’s weighted average cost of capital? Please do not use excel.

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Expert Solution

Market value of Equity = 8,500,000 shares * $34 per share= $289,000,000

Market value of bonds = 135,000 * 100 * 114% = $15,390,000

Total Market value = $289,000,000 + $15,390,000 = $304,390,000

Weight of Equity =We = Market value of Equity / Total Market value = $289,000,000 / $304,390,000 = 0.949943986 = 94.99%

Weight of Bongs = Wd = Market value of bonds / Total Market value = $15,390,000 / $304,390,000 = 0.05056014 = 5.01%

Yeild on bonds = rd = yeild on t bonds + default spread = 4% + 2.06% = 6.06%

Cost of equity = re = 13.4%

tax rate = t = 35%

Weighted Average Cost of Capital = [We * re] + [Wd * rd * (1-t)]

= [94.99% * 13.4%] + [5.01% * 6.06% * (1-35%)]

= 12.72866% + 0.214929%

= 12.943589%

Therefore, Weighted average cost of capital is 12.94%

jeff jeffy answered 2 years ago
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