Titan Mining Corporation, Inc. is capitalized with 10,000,000 shares of common stock, 1,000,000 shares of preferred...

Titan Mining Corporation, Inc. is capitalized with 10,000,000 shares of common stock, 1,000,000 shares of preferred stock, and 800,000 5.50% ($1,000 par) coupon bonds, paid semiannually. The bonds have 8 years left until maturity and are trading for 93% of par. The common stock currently sells for $40.72 per share and has a beta of 1.25. The company recently paid a common stock dividend of $4.35 per share, and such dividend is expected to grow at a rate of 4%, forever. The preferred stock, which has a 7.5% dividend, currently sells for $110.75 per share. The market return is 9.5%, T-Bills have a yield to maturity of 2.5%, and the company’s marginal tax rate is 30%. Please compute the following, and show all of your work:

-The firm’s component cost of Common Stock,

-The firm’s before-tax component cost of Debt,

-The firm’s component cost of Preferred Stock,

-The firm’s After-Tax Weighted Average Cost of Capital.

Solutions

Expert Solution

a. Cost of Common Stock:

Equity value	$407,200,000	Given in question (10,000,000 shares* $40.72 market value)
Beta	1.25	Given in question
Market Return	9.5%	Given in question
Risk free rate	2.50%	Given in question
Cost of Equity (using CAPM)	11.25%	*Risk free rate + (beta (market return-Risk Free rate))**

Cost of Common Stock = 11.25%

b. Cost of Debt (before tax)

Debt value	$744,000,000	Given in question (800000* 1000*93% )
Coupon	5.5%	Given in question
Payments	semi-annual	Given in question
Maturity (years)	8	Given in question
Number of coupon payments	16	(8 years * 2(semi-annual))
Par value of bonds	$1,000	Given in question
Current Value	$930	(1000*93%)
Coupon payment every semi-annual	$27.50	(1000*5.5%/2)
Semi annual YTM	3.32%	=rate(16,$27.50,-$930,$1,000)
Annual YTM	6.64%	*Semi annual YTM 2**
After tax Annual YTM	4.65%	*6.97%(100%-30%)**

Before tax cost of debt = 6.64%

c. Cost of Preferred Stock:

Preferred stock value	$110,750,000	Given in question (1,000,000shares* $110.75 market value)
Rate	7.5%	Given in question
Par value	$100	Given in question
Current Value	$111	Given in question
Dividend per year	$7.5	(100*7.5%)
Cost of Preferred stock	6.77%	$7.5/$111

Cost of Preferred Stock = 6.77%

d. After tax weighted average cost of capital:

Calculation of weightage:

Source of funds	Value	Weightage	Working
Debt	$744,000,000	58.96%	($744,000,000/$1,261,950,000)
Preference Stock	$110,750,000	8.78%	(110,750,000/$1,261,950,000)
Ordinary Stock	$407,200,000	32.27%	($407,200,000/$1,261,950,000)
Total	$1,261,950,000

Weighted cost of capital:

Source of funds	Weightage	Cost	*Cost of Capital (Weightage Cost)**
Debt	58.96%	4.65%	2.74%
Preference Stock	8.78%	6.77%	0.59%
Ordinary Stock	32.27%	11.25%	3.63%
Total	100.00%		6.97%

Weighted Cost of Capital = 6.97%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Titan Mining Corporation has 9.7 million shares of common stock outstanding, 410,000 shares of preferred stock...

Titan Mining Corporation has 9.7 million shares of common stock outstanding, 410,000 shares of preferred stock outstanding, and 215,000 bonds outstanding with a par value of $1,000 each. The common stock currently sells for $45 per share and has a beta of 1.35, the preferred stock currently sells for $95 per share, and the bonds sell for 116 percent of par. The cost of common equity is 16.48 percent, preferred equity is 4.21 percent, and the debt's yield to maturity...

Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of preferred stock...

Titan Mining Corporation has 8.9 million shares of common stock outstanding, 330,000 shares of preferred stock outstanding, and 175,000 bonds outstanding with a par value of $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 $87 per share, and the bonds sell for 118 percent of par. A. The cost of common equity is 15.17 percent, preferred equity is 5.75 percent, and the debt's yield to...

Titan Mining Corporation has 8 million shares of common stock outstanding, 5 million shares of preferred...

Titan Mining Corporation has 8 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 100,000 units of 9 percent semiannual bonds outstanding, par value $1,000 each. The preferred stock pays a dividend of $6 per share. The common stock currently sells for $32 per share and has a beta of 1.15, the preferred stock currently sells for $67 per share, and the bonds have 15 years to maturity and sell for 91 percent of par....

Titan Mining Corporation has 8 million shares of common stock outstanding, 5 million shares of preferred...

Titan Mining Corporation has 6.2 million shares of common stock outstanding, 215,000 shares of 3.5 percent...

Titan Mining Corporation has 6.2 million shares of common stock outstanding, 215,000 shares of 3.5 percent preferred stock outstanding, and 100,000 bonds with a semiannual coupon rate of 5.2 percent outstanding, par value $1,000 each. The common stock currently sells for $74 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $82 per share, and the bonds have 16 years to maturity and sell for 106 percent of...

titan mining corporation has 14 million shares of common stock outstanding 900,000 shares of 9 percent...

titan mining corporation has 14 million shares of common stock outstanding 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sell for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, T-bills are yielding 7.5...

Titan Mining Corporation has 9.9 million shares of common stock outstanding, 430,000 shares of 6 percent...

Titan Mining Corporation has 9.9 million shares of common stock outstanding, 430,000 shares of 6 percent preferred stock outstanding, and 225,000 8.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $47 per share and has a beta of 1.45, the preferred stock currently sells for $97 per share, and the bonds have 20 years to maturity and sell for 118 percent of par. The market risk premium is 8.7 percent, T-bills are yielding 5...

Titan Mining Corporation has 7.3 million shares of common stock outstanding, 265,000 shares of 4.5 percent...

Titan Mining Corporation has 7.3 million shares of common stock outstanding, 265,000 shares of 4.5 percent preferred stock outstanding, and 150,000 bonds with a coupon rate of 5.4 percent outstanding, par value $1,000 each. The common stock currently sells for $64 per share and has a beta of 1.20. The preferred stock has a par value of $100 and currently sells for $92 per share. The bonds have 16 years to maturity, pay semiannual coupons, and sell for 106 percent...

Titan Mining Corporation has 7.8 million shares of common stock outstanding, 290,000 shares of 4.3 percent...

Titan Mining Corporation has 7.8 million shares of common stock outstanding, 290,000 shares of 4.3 percent preferred stock outstanding, and 175,000 bonds with a semiannual coupon rate of 5.9 percent outstanding, par value $2,000 each. The common stock currently sells for $59 per share and has a beta of 1.05, the preferred stock has a par value of $100 and currently sells for $97 per share, and the bonds have 16 years to maturity and sell for 103 percent of...

Titan Mining Corporation has 9.5 million shares of common stock outstanding, 390,000 shares of 5 percent...

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...

Subjects