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story Bookmarks People WindowHelp mazon: Baby RxAPUS CLE: FINC McGraw-Hill EdX nnect.mheducation.com/flow/connect.html xConnect C Story Bookmark x Saved Help Save & Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding. par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and thGbonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and Titan Mining\'s tax rate is 35 percent. Debt Bonds outstanding Settlement date Maturity date Annual coupon rate Coupons per year Bond price (% of par) Par value (S) 135,000 01/01/00 01/01/15 114 1,000 Common stock Shares outstanding 8,500,000 docx CriticalareaofPubli...ocxStatement May 2018...df a Assignmentinstruct....docx

Solution

Cost of Debt

Yield to Maturity [YTM] = Coupon Amount + [(Face Value – Bond Price) / Maturity Years] / [(Face Value + Bond Price)/2]

= $75 + [($1,000 - $1,140) / 15)] / [($1,000 + $1,140) / 2]

= [($75 – 9.33) / $1,070] x 100

= 6.07%

Pre Tax Cost of Debt = 6.07%

After Tax Cost of Debt = 6.07 x [1-0.35] = 3.95%

Cost of Equity

Cost of Equity = Rf + [Beta x Market Risk Premium]

= 4% + [1.25 x 7.50%]

= 13.38%

Cost of Preferred Stock

Cost of Preferred Stock = [Preferred Dividend / Share Price] x 100

= [$5.00 / $91.00] x 100

= 5.49%

Market Value of Each Capital Components

Value of Debt = 135,000 x $1,000 x 114% = $153,900,000

Value of Equity = 850,000 x $34 = $289,000,000

Value of Preferred = 250,000 x $91 = $22,750,000

Total Value = $ 465,650,000

Weight of Debt, Equity, Preferred

Weight of Debt = $153,900,000 / $ 465,650,000 = 0.3305

Weight of Equity = $289,000,000 / $ 465,650,000 = 0.6206

Weight of Preferred = $22,750,000 / $ 465,650,000 = 0.0489

Weighted Average Cost of Capital

= [After Tax Cost of Debt x Weight of Debt ] + [ Cost of equity x Weight of common stock ] + [ Cost of Preferred stock x Weight of preferred stock ]

= [3.95% x 0.3305] + [13.38% x 0.6206] + [5.49% x 0.0489]

= 1.31% + 8.30% + 0.27%

= 9.88%