Question

Titan Mining Corporation has 9.2 million shares of common stock outstanding and 360,000 5.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $40 per share and has a beta of 1.3; the bonds have 15 years to maturity and sell for 111 percent of par. The market risk premium is 8 percent, T-bills are yielding 5 percent, and the company’s tax rate is 22 percent.

  

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

Answer 1

rate positively ..

	Rate of equity =
		Using CAPM rate of equity = Risk free rate + market risk premium * beta
					=5%+8%*1.3
					15.40%
	Rate of debt (after tax)
	we have to use financial calculator to compute YTM
	Put in calcualtor
	PV		-1110
	FV		1000
	PMT	1000*5.2%/2	26
	N	15*2	30
	Compute I		2.10%
	YTM =2.1%*2		4.20%
	tax rate =		22%
	therefore rate of debt (after tax) = 4.2%*(1-22%)					3.28%
	rate of debt (after tax) =			3.28%
Working for rest of question
Computation of Weight and WACC
			Market value			weight	Cost of capital	weight * cost
	Source
	equity		368000000	=9200000*40		47.94%	15.40%	7.38%
	debt		399600000	=360000*1000*111%		52.06%	3.28%	1.71%
	Total		767600000					9.09%
ans a)	market value capital structure
	Debt =	52.06%
	Equity=	47.94%
ans b)	firm should WACC computed above.
	WACC =		9.09%