Business, 21.11.2019 06:31 viv1302

Titan mining corporation has 9.7 million shares of common stock outstanding and 410,000 4.3 percent semiannual bonds outstanding, par value $1,000 each. the common stock currently sells for $45 per share and has a beta of 1.25; the bonds have 10 years to maturity and sell for 116 percent of par. the market risk premium is 8.5 percent, t-bills are yielding 5 percent, and the company’s tax rate is 22 percenta. what is the firm's market value capital structure? (do not round intermediate calculations and round your answers to 4 decimal places, e. g., .3216.)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 and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

Answers: 1

Show answers

Answers

Answer from: Dweath50

The firm´s capital structure is 48.4347%

, Debt (Bonds), 51.5653% Equity (Shares).

b) The firm must use 10.52% as its discount rate to discount any project's cash flows.

Explanation:

Hi, first we have to determine what percentage of the company´s capital is debt (bonds) and what portion is equity (shares). To do that, we need to find out the amounts of each of the sources mentioned above.

Debt(Bonds)=410,000*1,000=410,000,000

Equity(shares)=9,700,000*45=436,500,000

Therefore, the percentage of debt and equity is as follows.

$Debt(percentage)=\frac{ 410,000,000 }{410,000,000+436,500,000} =0.484347$

$Equity(percentage)=\frac{ 436,500,000 }{410,000,000+436,500,000} =0.515653$

Now, for the second question, we need to find out the yield of the bond and the cost of the shares (K(e)). First, let´s do the bond.

We need to solve for yield the following equation

$Price=\frac{Coupon((1+Yield)^{n}-1) }{Yield(1+Yield)^{n} } +\frac{FaceValue}{(1+Yield)^{n} }$

That is

$1,160=\frac{43((1+Yield)^{20}-1) }{Yield(1+Yield)^{20} } +\frac{1,043}{(1+Yield)^{20} }$

Since this is a very hard to solve, we need to use the MS Excel fuction called IRR, for that, please relate to the excel sheet attached to this answer and notice that in period 0, you have a positive cash flow and is equals to $1,160 and the coupons are $1,000*0.043=$43 (that is because the question says "4.3 percent semiannual bonds outstanding"). In period 20 (which is 10 years or 20 semesters) the last cash flow is -$1043, which is the face value plus the coupon. The function is located in cell C9.

Now, since the output of this formula is effective semi-annually, we have to find the effective annual rate, that is using the following formula.

$r(annual)=(1+0.032)^{2} -1=0.0651$

The yield of the bond is 6.51% effective annual.

On the other hand, the cost of equity is found by using the following equation.

K(e)=rf+beta*MRP

Where:

rf = risk free rate (that is the T-bills yield)

MRP= Market risk premium (in our case, 8.5%)

K(e)=cost of equity

So, everything should look like this.

r(e)=0.05+1.25*0.085=0.1563

So the K(e)= 15.63%

Now, the discount rate to be used for the evaluation of a project by this company is called WACC (weighted average cost of capital), which is found using the following formula.

WACC=Kd*DebtPercent*(1-Taxes)+Ke*EquityPecent

Kd= Cost of debt (6.51%)

Debt Percent=48.4347%

Equity Percent=51.5653%

Taxes =22%

Ke= Cost of equity (15.63%)

So, this is how we find it.

WACC=0.0651*0.484347*(1-0.22)+0.1563*0.515653=0.1052

So, the WACC (discount rate) is 10.52%

Best of luck.

Answer from: Quest

Hourly workers producing products

Answer from: Quest

idk the answer so dont listen too me

Another question on Business

Business, 21.06.2019 22:00

Select the correct answers. mila is at a flea market. she has $50 in her wallet. she decides that she will spend $15 on jewelry, $20 on a pair of jeans, $5 on a t-shirt, and $10 on something to eat. she likes a one-of-a-kind t-shirt, but the seller is not ready to sell it for less than $8. she thinks of five ways to deal with this situation. which two choices indicate a trade-off?

Answers: 3

Answer

Business, 22.06.2019 14:50

Ann chovies, owner of the perfect pasta pizza parlor, uses 20 pounds of pepperoni each day in preparing pizzas. order costs for pepperoni are $10.00 per order, and carrying costs are 4 cents per pound per day. lead time for each order is three days, and the pepperoni itself costs $3.00 per pound. if she were to order 80 pounds of pepperoni at a time, what would be the average inventory level?

Answers: 3

Answer

Business, 22.06.2019 16:00

In microeconomics, the point at which supply and demand meet is called the blank price

Answers: 3

Answer

Business, 22.06.2019 19:50

Ichelle is attending college and has a part-time job. once she finishes college, michelle would like to relocate to a metropolitan area. she wants to build her savings so that she will have a "nest egg" to start her off. michelle works out her budget and decides she can afford to set aside $9090 per month for savings. her bank will pay her 4 %4% per year, compounded monthly, on her savings account. what will be michelle's balance in five years?

Answers: 3

Answer

You know the right answer?

Titan mining corporation has 9.7 million shares of common stock outstanding and 410,000 4.3 percent...

Questions