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Titan Mining Corporation has 8.3 million shares of common stock outstanding and 270,000 5.3 percent semiannual bonds outstanding, par value $1,000 each.

Titan Mining Corporation has 8.3 million shares of common stock outstanding and 270,000 5.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $31 per share and has a beta of 1.15; the bonds have 15 years to maturity and sell for 112 percent of par. The market risk premium is 7.1 percent, T-bills are yielding 4 percent, and the company’s tax rate is 23 percent.

a.

What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .3216.)

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?

Expert Solution

A)

Market value of equity = Market price * o/s shares

Market value of equity = 8.3mn * 31

Market value of equity = $257.3m

Market value of debt = Par value * Premium rate* No. of Bonds

Market value of debt = 1000* (112/100) * 270,000

Market value of debt = $302.4

Total capital = Equity + Debt

Total capital = $257.3m + $302.4m

Total capital = $559.7m

We = Equity/ Capital

We = $257.3m/$559.7m

We = 0.4597

Wd = 1- We

Wd = 1- 0.4597

Wd = 0.5402

b) WACC = We* Ce + Wd* Cd* (1-T)

Ce, cost of equity = Rfr + B( market risk premium)

Ce, cost of equity = 4% + 1.15(7.1%)

Ce, cost of equity = 12.165%

Cd, cost of debt, we will use the financial calculator to compute the yield.

N = 30 ( converted to semi annual periods)

PV = 1120 (112% of FV)

FV = 1000

PMT = 26.5 ( converted into semi annual payments)

I/Y = 4.21% ( Annual rate)

Cd = Current rate* (1- tax rate)

Cd = 4.21% * (1-23%)

Cd = 3.24%

WACC = 0.4597*12.165% + 0.5402*3.24%

WACC = 7.34%, firm should use this rate to discount the cash flows

jeff jeffy answered 2 years ago

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