Question

In: Finance

Filer Mining Corporation has eight million shares of common stock outstanding, 400,000 shares of 4 percent...

Filer Mining Corporation has eight million shares of common stock outstanding, 400,000 shares of 4 percent preferred stock outstanding, and 150,000 7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $45 per share and has a beta of 0.90, the preferred stock currently sells for $70 per share, and the bonds have 15 years to maturity and sell for 90 percent of par. The market risk premium is 9 percent, the risk-free rate is 5 percent, and Filer Mining’s tax rate is 34 percent.

a. What are the firm’s market value capital structure weights?

b. If Filer Mining 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? (The YTM on the debt is either 6.17% or 8.17%).

Solutions

Expert Solution

Filer Mining Corporation has eight million shares of common stock outstanding, 400,000 shares of 4 percent preferred stock outstanding, and 150,000 7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $45 per share and has a beta of 0.90, the preferred stock currently sells for $70 per share, and the bonds have 15 years to maturity and sell for 90 percent of par. The market risk premium is 9 percent, the risk-free rate is 5 percent, and Filer Mining’s tax rate is 34 percent.

a. What are the firm’s market value capital structure weights?

Common stock

8 million shares, currently selling for $45

Market value of Common stock   = 8000000 * 45 = $ 360000000

Preferred stock

400000 shares, currently sells for $ 70

Market value of preferred stock = 400000 * 70   = $ 28000000

Debt

150000 bonds, 1000 par value. Currently traded 90% of par = 1000 * 90% = 900

Market value of debt    =   150000 * 900 = 135000000

Total market value = 360000000 + 28000000 + 135000000 = 523000000 = 100%

Weight of Common stock = 360000000 / 523000000   = 0.6883 = 68.83%

Weight of Preferred stock = 28000000 / 523000000   = 0.0535 = 5.36%

Weight of Debt   = 135000000 / 523000000   = 0.2581   = 25.81%

b. If Filer Mining 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?

Here the firm should use the company Weighted average cost of capital. Of   10.71%

Calculation

WACC = ( cost of equity * weight ) + ( cost of preferred stock * weight ) + ( cost of debt * weight)

For calculating first we need to calculate each components cost.

Cost of equity = Here the data are given, based on those data we can calculate cost of equity under CAPM

Under CAPM (capital assets pricing model)

Cost of equity = Rf + beta * ( Km - Rf )

Where,

Rf = risk-free rate is 5 percent

beta = 0.90

market risk premium is   = ( Km - Rf ) = 9%

Cost of equity = 5% + 0.90 * 9 = 5 + 8.1 = 13.10%

Cost of preferred stock = D / M

Where,

D = dividend = par value * rate = assume that par value is 100 * 4% = 4

M = market current price = 70

Cost of preferred stock = 4 / 70 = 0.0571 = 5.71%

After tax cost of debt = Before tax cost of debt - tax rate

Before tax cost of debt = yield to maturity(YTM)

The formula for YTM = ( C + ( ( P - M ) / n ) ) / ( ( p + m ) / 2 )

Where,

C (coupon interest) = Par value * Coupon rate   = *$1000 *   7% = 70

P (Par Value ) = $1000

M (Market Price) = 900

n (years to maturity) = 15 years

By applying values into the formula we get,

YTM = ( 70  + ( ( $1000 - 900 ) / 15 ) ) / ( ( $1000 + 900 ) / 2 )

YTM = ( 70 + 100 / 15 ) / ( 1900 / 2 )

YTM =   ( 70 + 6.667 ) / 980

YTM = 76.667 / 950 =   0.0807 = 8.07%   in the question 8.17%   difference is from estimation. 8.17% is the correct (we can see it using the online ytm calculator) so, no problem

So the cost of debt before tax = 8.17%

After tax cost of debt = before tax cost of debt * ( 1 - tax rate )

Where,

cost of debt before tax = 8.17%

Tax rate = 34%

After tax cost of debt = 8.17% ( 1 - 34% ) = 5.39%

Next we calculate WACC

WACC = ( 13.10 * 68.83% ) + ( 5.71 * 5.36% ) + ( 5.39% * 25.81% )

WACC = 9.0167 + 0.306 + 1.39   =   10.71%


Related Solutions

Titan Mining Corporation has 9.6 million shares of common stock outstanding and 400,000 6 percent semiannual...
Titan Mining Corporation has 9.6 million shares of common stock outstanding and 400,000 6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $44 per share and has a beta of 1.3, and the bonds have 20 years to maturity and sell for 115 percent of par. The market risk premium is 8.4 percent, T-bills are yielding 4 percent, and the company’s tax rate is 40 percent.    a. What is the firm's market value...
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent...
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.40, the preferred stock currently sells for $86 per share, and the bonds have 10 years to maturity and sell for 117 percent of par. The market risk premium is 7.6 percent, T-bills are yielding 5...
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...
itan Mining Corporation has 7.9 million shares of common stock outstanding, 295,000 shares of 4.2 percent...
itan Mining Corporation has 7.9 million shares of common stock outstanding, 295,000 shares of 4.2 percent preferred stock outstanding, and 180,000 bonds with a semiannual coupon rate of 5.7 percent outstanding, par value $2,000 each. The common stock currently sells for $58 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $98 per share, and the bonds have 17 years to maturity and sell for 106 percent of...
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...
Titan Mining Corporation has 9 million shares of common stock outstanding, 340,000 shares of 6 percent...
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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT