1 answer

Titan Mining Corporation has 9.2 million shares of common stock outstanding and 360,000 5.2 percent semiannual...

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?

Answers

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%
.

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