Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The market risk premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm's tax rate is 32 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project?

Question

Quizplus · Accepted Answer

MV_D = 210,000 ($1,000) (0.91) = $191,100,000MV_E = 14,000,000 ($34) = $476,000,000MV_P = 900,000 ($80) = $72,000,000V = $191,100,000 + $476,000,000 + $72,000,000 = $739,100,000D/V = $191,100,000/$739,100,000 = 0.258558E/V = $476,000,000/$739,100,000 = 0.644027P/V = $72,000,000/$739,100,000 = 0.097416R_E = 0.075 + 1.15(0.115) = 0.20725R_P = $9/$80 = 0.1125 R_{D Aftertax} = 0.1119514 (1 - 0.32) = 0.076127WACC = 0.644027(0.20725) + 0.097416 (0.1125) + 0.258558 (0.076127) = 16.41 percent

Titan Mining Corporation Has 14 Million Shares of Common Stock