Question

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 percent, and the company’s tax rate is 38 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
Preferred stock
Equity

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

Current value of bonds=117%*1000=1170

Total Debt=1170*170000=198900000

Preferred Stock=320000*86=27520000

Equity=8.8*10^6*36=316800000

Weights:

Debt=198900000/(198900000+27520000+316800000)=0.3661

Preferred Stock=27520000/(198900000+27520000+316800000)=0.0507

Equity=316800000/(198900000+27520000+316800000)=0.5832

cost of debt=RATE(10*2,7.6%*1000/2,-117%*1000,1000)*2=5.38%

cost of preferred stock=4%*100/86=4.65%

Cost of equity=risk free+beta*(market risk premium)=5%+1.4*7.6%=15.64%

Discount rate=0.3661*5.38%*(1-38%)+0.0507*4.65%+0.5832*15.64%=10.58%