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Titan Mining Corporation has 8.7 million shares of common stock outstanding and 230,000 6.4 percent semiannual...

Titan Mining Corporation has 8.7 million shares of common stock outstanding and 230,000 6.4 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $37 per share and has a beta of 1.20, 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 the firm's market value capital structure?

b. If Titan 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? (Do not round intermediate calculations.

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Answer #1

a. Market Value of Equity =Number of Shares*Share Price =8700000*37 =321900000
Market Value of Debt =Number of Bond *Price of Bond =230000*1000*104% =239200000
Total Market Value =321900000+239200000 =561100000
Weight of Equity =321900000/561100000=57.37%
Weight of Debt =239200000/561100000 =42.36%

b. Cost of Equity =Risk Free Rate+Beta*(Market return-Risk Free rate) =3.5%+1.2*7% =11.9%
Number of Periods =20*2 =40
Price of Bond =1000*104% =1040
Semi annual Coupon =6.4%*1000/2 =32
Par Value =1000
Cost of Debt using excel formula =2*RATE(40,32,-1040,1000) =6.0524%
Discount Rate =Weight of Equity*Cost of equity+Weight of Debt*Cost of Debt*(1-Tax Rate)
=321900000/561100000*11.9%+239200000/561100000*6.0524%*(1-35%) =8.50%

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