In: Finance
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 percent, and the company’s tax rate is 36
percent.
a. What is the firm’s market value capital structure?
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?