Problem 14-16 Finding the WACC [LO3] Titan Mining Corporation has 8.8 million sh
ID: 2727613 • Letter: P
Question
Problem 14-16 Finding the WACC [LO3]
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.40, the preferred stock currently sells for $86 per share, and the bonds have 10 years to maturity and sell for 117 percent of par. The market risk premium is 7.6 percent, T-bills are yielding 5 percent, and the company’s tax rate is 38 percent.
What is the firm’s market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places, e.g., 32.1616.)
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.)
Titan Mining Corporation has 8.8 million shares of common stock outstanding, 320,000 shares of 4 percent preferred stock outstanding, and 170,000 7.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $36 per share and has a beta of 1.40, the preferred stock currently sells for $86 per share, and the bonds have 10 years to maturity and sell for 117 percent of par. The market risk premium is 7.6 percent, T-bills are yielding 5 percent, and the company’s tax rate is 38 percent.
Explanation / Answer
Part a)
Market value weight = market value of a source / Total market value
Source
Price
Units
Market Value
Weights
Debt
1170
170,000
198900000
0.3661
Preferred Stock
86
320,000
27520000
0.0507
Equity
36
8,800,000
316800000
0.5832
543220000
Part B
Ke = Rf + MRP x beta
= 0.05 + 0.076 x 1.40
= 15.64%
Kp = Annual dividend / Price
= 100 x 4%/ 86
= 4.65%
Kd = Rd x (1-t)
= 2.6898% x2 x (1-0.38)
= 3.34%
Part B)
Discount rate = sum of weight x cost
Source
Weights
Cost
Weight x cost
Debt
0.3661
15.64%
0.0573
Preferred Stock
0.0507
4.65%
0.0024
Equity
0.5832
3.34%
0.0195
0.0791
Discount rate = 0.0791 = 7.91%
Source
Price
Units
Market Value
Weights
Debt
1170
170,000
198900000
0.3661
Preferred Stock
86
320,000
27520000
0.0507
Equity
36
8,800,000
316800000
0.5832
543220000