Question

Example 6: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 1.20, 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 4 percent, and Titan Mining’s tax rate is 35 percent. The firm also has 1.5M Preferred stocks ($100 par) with 5.67% coupon rate. Each preferred stock is trading at 75.6 on the stock market.

1. What is the firm’s market value capital structure?
2. Compute Ke, Kd(1-T) and Kp
3. 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?

Answer 1

IF ANY QUERY, FEEL FREE TO ASK Solution a. Firm's market value capital structure Selling PARTICULARS Number Market Value Price Bond 260000 1040 $270,400,000 Common Stock 9300000 34 $316,200,000 Preferred Stock 1500000 75.6 $113,400,000 Total Market Value $700,000,000 where, Bond Selling Price 1000 x 104% = 1040 Market Value Number X Selling price Total Market Value Market value of Bond + Common Stock + Preferred stock b. Cost of Various funding PARTICULARS Bond - Kd(1-T) Common Stock - Ke Preferred Stock - Kp K (cost) 2.09% 12.40% | 7.50%) K debt YTM (Yeild to maturity) X (1-tax rate) where YTM is rate at which PV of future cashflow is equal to Selling price YTM RATE(20*2,1000*6.8%/2,-1000* 104%, 1000) RATE(Period, Coupon Payment,-Selling Price,Face Value) K Common Stock Risk free return + Beta X Market risk premium using CAPM model K Preferred Stock Return X 100 Selling price c. Firm discount rate for the project's cash flows PARTICULARS Weight JK (cost) Bond Common Stock Preferred Stock WACC 38.63% 45.17% 16.20% 2.09% 12.40% 7.50% Weighted K(cost) 0.809% 5.601% 1.215% 7.625% Weight Weighted cost WACC Market Value / Total Market value K (Cost) X Weight Sum of all weighted K (cost) Hence, discount rate for project's cashflow is 7.625%