Question

Raymond Mining Corporation has 8.7 million shares of common stock outstanding, 310,000 shares of 6% $100 par value preferred stock outstanding, and 147,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.35, the preferred stock currently sells for $91 per share, and the bonds have 20 years to maturity and sell for 116% of par. The market risk premium is 7.5%, T-bills are yielding 5%, and Raymond Mining’s tax is 30%.

a. What is the firm’s market value capital structure?

	Market value
Debt
Equity
Preferred stock

b. If Raymond 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?

Discount rate is ?

Answer 1

1. Capital structure of equity = 13.29%
Capital structure of debt = 74.40%
Capital structure of preference = 12.31%

2. The rate which the firm use to discount the project’s cash flows = WACC = WEIGHTED AVERAGE COST OF CAPITAL.  

It's the overall cost of raising funds for the firm.

The weighted average cost of capital= (weight of equity x cost of equity)+(weight of debt x cost of debt)+(weight of preference x cost of preference)

{Look at the notes attached)

=4.99%

The rate which the firm use to discount the project’s cash flows = 4.99%

Capital Storuchne (we) 13.29%/0.13 2 -14+,0e0 X1o x1l Cuwa) 44.40l0.440 Euiry 8,t00,000 x35 1 30,450,000 Debt to,520,000 Prefane 310,000 X91 Cup 28, 210,oU 12. O.12 31 Total 229, 180,00O ke = 5 +C+-5-5)-35 8.3751. ka-5 1-o-3) 1o00-1160 20X2 2 looD+116o 2 4.12-7. 6.59/ 6.59 39 x 100 KP- 9 1 x6-59/.