Titan Mining Corporation has 6.4 million shares of common stock outstanding, 225,000 shares of 3.7 percent preferred stock outstanding, and 110,000 bonds with a semiannual coupon rate of 5.4 percent outstanding, par value $1,000 each. The common stock currently sells for $72 per share and has a beta of 1.20, the preferred stock has a par value of $100 and currently sells for $84 per share, and the bonds have 18 years to maturity and sell for 108 percent of par. The market risk premium is 7.2 percent, T-bills are yielding 3.2 percent, and the company’s tax rate is 24 percent.

Titan Mining Corporation has 6.4 million shares of common stock outstanding, 225,000 shares of 3.7 percent preferred stock outstanding, and 110,000 bonds with a semiannual coupon rate of 5.4 percent outstanding, par value $1,000 each. The common stock currently sells for $72 per share and has a beta of 1.20, the preferred stock has a par value of $100 and currently sells for $84 per share, and the bonds have 18 years to maturity and sell for 108 percent of par. The market risk premium is 7.2 percent, T-bills are yielding 3.2 percent, and the company’s tax rate is 24 percent.

a.	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.)

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Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.​

a.

We will begin by finding the market value of each type of financing. We find:

MVD = 110,000($1,000)(1.08) = $118,800,000

MVP = 225,000($84) = $18,900,000

MVE = 6,400,000($72) = $460,800,000

And the total market value of the firm is:

V = $118,800,000 + 460,800,000 + 18,900,000 = $598,500,000

So, the market value weights of the company’s financing are:

D/V = $118,800,000/$598,500,000 = .1985

P/V = $18,900,000/$598,500,000 = .0316

E/V = $460,800,000/$598,500,000 = .7699

b.

For projects equally as risky as the firm itself, the WACC should be used as the discount rate.

First we can find the cost of equity using the CAPM. The cost of equity is:

RE = .032 + 1.20(.072)

RE = .1184, or 11.84%

The cost of debt is the YTM of the bonds, so:

P0 = $1,080 = $27.00(PVIFAR%,36) + $1,000(PVIFR%,36)

R = 2.367%

YTM = 2.367% × 2 = 4.73%

And the aftertax cost of debt is:

RD = (1 – .24)(.0473)

RD = .0360, or 3.60%

The cost of preferred stock is:

RP = $3.70/$84

RP = .0440, or 4.40%

Now we can calculate the WACC as:

WACC = .1985(.0360) + .0316(.0440) + .7699(.1184)

WACC = .0997, or 9.97%

Lannister Manufacturing has a target debt-equity ratio of .70. Its cost of equity is 11 percent, and its cost of debt is 7 percent. If the tax rate is 21 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Lannister Manufacturing has a target debt-equity ratio of .70. Its cost of equity is 11 percent, and its cost of debt is 7 percent. If the tax rate is 21 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Targaryen Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.

Targaryen Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.

a.	What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 19 years to maturity that is quoted at 97 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually.

Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 19 years to maturity that is quoted at 97 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually.

a.	What is the company’s pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	If the tax rate is 23 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

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