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Titan Mining Corporation has 8.5 million shares of common stock outstanding and 200,000 8% coupon long...

Titan Mining Corporation has 8.5 million shares of common stock outstanding and 200,000 8% coupon long term bonds outstanding, par value $1,000 each. The common stock currently trading at $34 per share and the bond is now selling at par value. The company is expected to pay a dividend of $2.516 next year and the dividend growth rate is 6%. Titan Mining's tax rate is 35%

a. What is the required rate of return of Titan's share?

b. What is the after-tax cost of debt for Titan

c. What is the WACC of the Titan?

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Answer #1

a) Price of the share Dividend/(Required Rate of Return Growth Rate) 34-2.516/(Required Rate of Return 0.06) Required Rate of Retur0.06 (2.516/34) Required Rate of Return 0.06 0.074 Required Rate of Return 0.074+0.06 Required Rate of Return-13.40% b) Since the Bond is selling at Par, Coupon Rate Cost of Bond After tax cost of debt is-890 (1-Tax Rate) After tax cost of debt 15-8%(1-0.35) After tax cost of debt is 5.20% After-tax cost of debt for Titan is-5.20% c) Computation of WACC: Capital Miln $ Weight of Capital Post tax cost of Capital Weighted Average cost of Capital Source Equity 59.10% 13.40% 289.00 200.00 489.00 7 920% 2.13% 10.05% Debt 40.90% 5.20% WACC WACC of the Titan is 10.05%

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