Raymond Mining Corporation has 9.8 million shares of common stock outstanding, 420,000 shares of 5% $100 par value pref...

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Raymond Mining Corporation has 9.8 million shares of common stock outstanding, 420,000 shares of 5% $100 par value preferred

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Answer 1

Answer #1

a.

Total capital = Market value of debt + Market value of equity + Market value of preferred stock
= (169,000 x $1000 * 117%) + (9,800,000 x $46) + (420,000 x $95)
= $197,730,000 + $450,800,000 + $39,900,000
= $688,430,000

Market value weight of debt = $197,730,000/ $688,430,000 = 0.2872

Market value weight of equity =$ 450,800,000 / $688,430,000 = 0.6548

Market value weight of preferred stock = $39,900,000 / $688,430,000 = 0.05795 or 0.0580

b.

Cost of debt:

Approx YTM = [C + (F-P)/n] / [(F+P)/2]
= [37.5 + (1000 - 1170)/30] / [(1000 + 1170)/2]
= (37.5 - 5.6666 )/ 1085 = 31.8333/ 1085 = 2.94%

Calculate NPV at 2.5%, then at 3%, then interpolate the results

Semi-annual YTM = 2.8789% or 2.88%

YTM = 2.88% x 2 = 5.76%

After tax cost of debt = 5.76% x (1 - 0.40) = 3.456%

Cost of equity:

It is calculated by using CAPM ( Capital Asset Pricing Model)

= Risk free rate + (Beta x Market risk premium)
= 4 + (1.40 x 8.6) = 4 + 12.04
= 16.04%

Cost of preferred stock:

= Dividend per share / Price
= $5 / $95
= 5.26%

Discount rate = (Cost of debt x weight of debt) + (cost of equity x weight of equity) + (Cost of preferred stock x weight of preferred stock)
= (3.456 x 0.2872) + (16.04 x 0.6548) x (5.26 x 0.0580)
= 0.9926% + 8.7899% + 0.30508 % = 10.0875 % or 10.09%.

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Answer 2

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