Question

Titan mining corporation has 8.9 million shares of common stock outstanding, 330,000 shares of 5 percent preferred stock outstanding, and 175,000 7.7 percent semiannual bonds outstanding, par value $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 have 15 years to maturity and sell for 118 percent of par. the market risk premium is 7.7 percent, t-bills are yielding 4 percent, and the company's tax rate is 40 percent.
a. what is the firm's market value capital structure? (do not round intermediate calculations. round your answers to 4 decimal places,
e.g., 32.1616.) market value weight debt 0.3658 preferred stock 0.5833 equity 0.5090
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? (do not round intermediate calculations. enter your answer as a percent rounded to 2 decimal places,
e.g., 32.16.) discount rate %

Answer 1

a. Equity =8,900,000*37 = 329.3 Million

Preferred stock = 330,000*87 = 28.71 Million

Debt = 175,000*1000*1.18 = 206.5 Million

Total = 329.3 + 28.71 + 206.5 = 564.51

Market value Weight of debt = 206.5/564.51 = 0.3658

Market value of preferred stock = 28.71/564.51 = 0.0509

Market value of equity = 1-0.3658-0.0509 = 0.5833

b. Cost of equity = Rf + beta * Market risk premium = 4+1.45*7.7 = 15.165%

Cost of debt = YTM =rate(nper,pmt,pv,fv)*2 =rate(30,77/2,-1180,1000) *2 = 5.8778%

After tax cost of debt = 5.8778*(1-0.4) = 3.5267%

Cost of preferred stock = 5/87 = 0.057471 = 5.7471%

WACC = 0.5833*15.165% +0.3658*3.5267 +0.0509*5.7471% = 10.43%