Problem 14-16 Finding the WACC Titan Mining Corporation has 8.7 million shares o
ID: 2660949 • Letter: P
Question
Problem 14-16 Finding the WACC
Titan Mining Corporation has 8.7 million shares of common stock outstanding, 310,000 shares of 6 percent preferred stock outstanding, and 165,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.35, the preferred stock currently sells for $85 per share, and the bonds have 20 years to maturity and sell for 116 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 5 percent, and Titan Miningâs tax rate is 30 percent.
What are the firmâs market value capital structure weights? (Round your answers to 4 decimal places. (e.g., 32.1616))
If Titan Mining is evaluating a new investment project that has the same risk as the firmâs typical project, what rate should the firm use to discount the projectâs cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Titan Mining Corporation has 8.7 million shares of common stock outstanding, 310,000 shares of 6 percent preferred stock outstanding, and 165,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.35, the preferred stock currently sells for $85 per share, and the bonds have 20 years to maturity and sell for 116 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 5 percent, and Titan Miningâs tax rate is 30 percent.
Explanation / Answer
we Have P0= $35, beta = 1.35, Krf = 5%, MRP = 7.5%
So Cost of equity Ks = Krf + beta*MRP
= 5% + 1.35*7.5% = 15.13%
Pref Stock is trading at $85, Div rate 6%
So Kp = Div/Current price = 6%*100/85 = 7.06%
We need to calculate weights based on Mkt rates.
So Total Debt = bond issue = 165000*1000*1.16 = $191,400,000
Also Kd = 2*Rate(nper,pmt,pv,fv)
= 2*rate(20*2,75/2,-1160,1000) = 6.10%
Pref stock at mkt rate = 85*310000 = $26,350,000
COmmon stock = $35*8.7M =$304,500,000
Mkt value of Firm = Debt + Pref Stock + COmmon stock
= $522,250,000
So Weight of Debt Wd = 191,400,000/$522,250,000 = 0.3665
Weight of Pref stock Wp = 26,350,000/$522,250,000 = 0.0505
Weight of equity We = 304500000/$522,250,000 = 0.5830
WACC (Ka)= Wd*(Kd)*(1-t) + (We)*(Ke) + (Wp)*(Kp)
where Wd= The proportion of the financing taken on by debt
We= The proportion of the financing provided by equity
T=30%
ie WACC = 0.3665*6.10%*(1-30%) + 0.0505*7.06% + 0.5830*15.13%
ie WACC = 10.74%