Question

Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250,000 shares of 5% preferred stock outstanding, and 135,000 7.5% semi-annual bonds outstanding, with a par value of $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114% of par. The market return is 11.5%, and T bills are yielding 4%. Titan Mining’s tax rate is 35%. 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

Answer and Explanation:

The computation of firm’s market value capital structure and the Weighted average cost of capital is shown with the help of spreadsheet. Kindly find it below

The formulas that we use in spreadsheet is shown below:-

WACC = Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of common stock) × (cost of common stock)

As per question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below  

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)  

The market rate of return - risk free rate of return = market risk premium

Answer 2

• The calculation of firm’s market value capital structure and the Weighted average cost of capital is to be given in the attachment

The formulas that we use in spreadsheet is shown below:-

WACC = Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of common stock) × (cost of common stock)

According to the question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below  

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)  

Here,  

The market rate of return - risk free rate of return = market risk premium

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