Question

Ophir Mining Corporation has 6.3 million ordinary shares outstanding; 350000, 5.8% preference

shares outstanding, and 150000, 7.1% half-yearly bonds outstanding, par value $1000 each. The

ordinary shares currently sell for $74 and have a beta of 1.09; the preference shares sell for $107;

and the bonds have 20 years to maturity and sell for 109% of par. The market risk premium is

6.8%; government bonds are yielding 4.3%; and Ophir Mining’s tax rate is 30%. The book value

of one preference share is $100.

a.What is the firm’s market-value capital structure?

b. If Ophir 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 under a classical tax system?

show steps, plz, i will rate PS. especially the YTM steps.

Answer 1

cost of equity = 4.3% + 1.09*6.8%

cost of preferred shares = 5.8/107

cost of bond: FV = 1000, N = 40, PV = -1090, PMT = 7.1%/2 * 1000 = 35.5

use rate function in Excel with the inputs above and multiply by 2*(1 - 0.30)

after tax cost of debt = 4.412%

	market value	weight	cost	weight*cost
common	466,200,000.00	69.8793%	11.712%	0.0818
debt	163,500,000.00	24.5072%	4.412%	0.0108
pref stock	37,450,000.00	5.6134%	5.421%	0.0030
	-
total	667,150,000.00			9.5697%
	WACC = 9.57%