Question

Titan mining corporation has 8.1 million shakers of common stock outstanding, 300,000 shares of 4.1 percent preferred stock outstanding, and 185,000 bonds with semiannual coupon rate of 5.5 percent outstanding, Par value $2,000 each. the common stock currently sells for $57 per share and has a beta of 1.15

Ouluse & Maps 4 - Cost of Capital Titan Mining Corporation has 8.1 million shares of common stock outstanding. 300,000 shares of 4.1 percent preferred stock outstanding, and 185.000 bonds with a semiannual coupon rate of 5.5 percent outstanding par value $2.000 each. The common stock currently sells for $57 per share and has a beta of 115. the preferred stock has a par value of $100 and currently sells for $99 per share, and the bonds have 18 years to maturity and sell for 107 percent of par. The market risk premium is 6.6 percent T-bills are yielding 33 percent, and the company's tax rate is 24 percent 6. What is the firm's market value capital structure? (Do not round Intermediate calculations and round your answers to 4 decimal places, e.g. 1616.) 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? (Do not round Intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.)

Answer 1

	Value (m$)	Weight	Cost
Equity	461.7	0.5203	10.89%
Preferred	29.7	0.0335	4.14%
Debt	395.9	0.4462	4.91%
Total	887.3	WACC	7.47%

Value = No. of shares x Price

Weight = Value / Total

Cost of equity, re = Rf + beta x MRP = 3.3% + 1.15 x 6.6% = 10.89%

Cost of preferred, rp = D / P = 4.1 / 99 = 4.14%

Cost of debt can be calculated using I/Y function on a calculator

N = 18 x 2 = 36, PMT = 5.5 / 2 = 2.75, PV = -107, FV = 100 => Compute I/Y = 2.455% (semi-annual)

=> Cost of debt, rd = 2.455% x 2 = 4.91%

Discount rate = we x re + wp x rp + wd x rd x (1 - tax)

= 0.5203 x 10.89% + 0.0335 x 4.14% + 0.4462 x 4.91% x (1 - 24%)

= 7.47%