Question

In: Finance

Titan Mining Corporation has 9.3 million shares of common stock outstanding and 260,000 6.8 percent semiannual...

Titan Mining Corporation has 9.3 million shares of common stock outstanding and 260,000 6.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.2, and the bonds have 20 years to maturity and sell for 104 percent of par. The market risk premium is 7 percent, T-bills are yielding 3.5 percent, and Titan Mining's tax rate is 35 percent?

a. What is Titan's cost of debt?

b. What us Titan's cost of equity?

c. What is Titan's weighted average cost of capital (WACC) using market value weights?

d. What discount rate should Titan use to evaluate a new investment project that has the same risk as the firm's typical project?

Expert Solution

Answer a.

Number of bonds outstanding = 260,000
Face Value = $1,000

Current Price = 104% * $1,000
Current Price = $1,040

Value of Debt = 260,000 * $1,040
Value of Debt = $270,400,000

Annual Coupon Rate = 6.80%
Semiannual Coupon Rate = 3.40%
Semiannual Coupon = 3.40% * $1,000
Semiannual Coupon = $34

Time to Maturity = 20 years
Semiannual Period to Maturity = 40

Let Semiannual YTM be i%

$1,040 = $34 * PVIFA(i%, 40) + $1,000 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -1040
PMT = 34
FV = 1000

I = 3.22%

Semiannual YTM = 3.22%
Annual YTM = 2 * 3.22%
Annual YTM = 6.44%

Cost of Debt = Annual YTM
Cost of Debt = 6.44%

Answer b.

Number of shares outstanding = 9,300,000
Current Price = $34

Value of Equity = 9,300,000 * $34
Value of Equity = $316,200,000

Cost of Equity = Risk-free Rate + Beta * Market Risk Premium
Cost of Equity = 3.50% + 1.20 * 7.00%
Cost of Equity = 11.90%

Answer c.

Value of Firm = Value of Debt + Value of Common Stock
Value of Firm = $270,400,000 + $316,200,000
Value of Firm = $586,600,000

Weight of Debt = $270,400,000 / $586,600,000
Weight of Debt = 0.4610

Weight of Equity = $316,200,000 / $586,600,000
Weight of Equity = 0.5390

WACC = Weight of Debt * Cost of Debt * (1 - Tax Rate) + Weight of Equity *Cost of Equity
WACC = 0.4610 * 6.44% * (1 - 0.35) + 0.5390 * 11.90%
WACC = 8.34%

Answer d.

Titan should use WACC i.e., 8.34% as discount rate in order to evaluate a new investment project.

jeff jeffy answered 1 year ago

Titan Mining Corporation has 7.2 million shares of common stock outstanding, 260,000 shares of 4.4 percent...

Titan Mining Corporation has 7.2 million shares of common stock outstanding, 260,000 shares of 4.4 percent preferred stock outstanding, par value $2,000 each. The common stock currently sells for $65 per share and has a beta of 1.15, the preferred stock has a par value of $100 and currently sells for $91 per share, and the bonds have 15 years to maturity and sells for $105 percent of par . The market risk premium is 7.5 percent, T-bills are yielding...

Titan Mining Corporation has 6.8 million shares of common stock outstanding, 245,000 shares of 4.1 percent...

Titan Mining Corporation has 6.8 million shares of common stock outstanding, 245,000 shares of 4.1 percent preferred stock outstanding, and 130,000 bonds with a semiannual coupon rate of 5.8 percent outstanding, par value $1,000 each. The common stock currently sells for $68 per share and has a beta of 1.20, the preferred stock has a par value of $100 and currently sells for $88 per share, and the bonds have 17 years to maturity and sell for 106 percent of...

Titan Mining Corporation has 9.7 million shares of common stock outstanding and 410,000 4.3 percent semiannual...

Titan Mining Corporation has 9.7 million shares of common stock outstanding and 410,000 4.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $45 per share and has a beta of 1.25; the bonds have 10 years to maturity and sell for 116 percent of par. The market risk premium is 8.5 percent, T-bills are yielding 5 percent, and the company’s tax rate is 22 percent a. What is the firm's market value capital structure?...

Titan Mining Corporation has 9 million shares of common stock outstanding and 340,000 6 percent semiannual...

Titan Mining Corporation has 9 million shares of common stock outstanding and 340,000 6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $38 per share and has a beta of 1.5, 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...

Titan Mining Corporation has 9.2 million shares of common stock outstanding and 360,000 5.2 percent semiannual...

Titan Mining Corporation has 9.2 million shares of common stock outstanding and 360,000 5.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $40 per share and has a beta of 1.3; the bonds have 15 years to maturity and sell for 111 percent of par. The market risk premium is 8 percent, T-bills are yielding 5 percent, and the company’s tax rate is 22 percent. a. What is the firm's market value capital...

Titan Mining Corporation has 9.4 million shares of common stock outstanding and 380,000 4.8 percent semiannual...

Titan Mining Corporation has 9.4 million shares of common stock outstanding and 380,000 4.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $42 per share and has a beta of 1.1; the bonds have 10 years to maturity and sell for 113 percent of par. The market risk premium is 8.2 percent, T-bills are yielding 3 percent, and the company’s tax rate is 24 percent. a. What is the firm's market value capital...

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 8.6 million shares of common stock outstanding and 300,000 5 percent semiannual...

Titan Mining Corporation has 8.6 million shares of common stock outstanding and 300,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.3, and the bonds have 15 years to maturity and sell for 115 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3 percent, and the company’s tax rate is 40 percent. a. What is the firm's market value...

Titan Mining Corporation has 8.4 million shares of common stock outstanding and 280,000 5.8 percent semiannual...

Titan Mining Corporation has 8.4 million shares of common stock outstanding and 280,000 5.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $32 per share and has a beta of 1.2; the bonds have 20 years to maturity and sell for 113 percent of par. The market risk premium is 7.2 percent, T-bills are yielding 5 percent, and the company’s tax rate is 24 percent. a. What is the firm's market value capital...

Titan Mining Corporation has 9.1 million shares of common stock outstanding and 350,000 4.7 percent semiannual...

Titan Mining Corporation has 9.1 million shares of common stock outstanding and 350,000 4.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $39 per share and has a beta of 1.25; the bonds have 10 years to maturity and sell for 110 percent of par. The market risk premium is 7.9 percent, T-bills are yielding 5 percent, and the company’s tax rate is 21 percent. a. What is the firm's market value capital structure?...