Titan Mining Corporation has 14 million shares of common stock outstanding,900,000 shares of 9 percent preferred stock outstanding and 220,000 ten percent semiannual bonds outstanding,par value $1,000 each.The common stock currently sells for $42 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?

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Quizplus · Accepted Answer

MV_D = 220,000 ($1,000) (0.91) = $200,200,000MV_E = 14,000,000 ($42) = $588,000,000MV_P = 900,000 ($80) = $72,000,000V = $200,200,000 + $588,000,000 + $72,000,000 = $860,200,000D/V = $200,200,000/$860,200,000 = 0.232737E/V = $588,000,000/$860,200,000 = 0.683562P/V = $72,000,000/$860,200,000 = 0.083701R_E = 0.075 + 1.15(0.115) = 0.20725R_P = $9/$80 = 0.1125 R_{D Aftertax} = 0.1119514 (1 - 0.32) = 0.076127WACC = 0.683562(0.20725) + 0.083701 (0.1125) + 0.232737 (0.076127) = 16.88 percent

Titan Mining Corporation Has 14 Million Shares of Common Stock