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Estimating the wacc

1. (Answer using Excel) Finding the WACC: Given the following information for Huntington Power Co., find the WACC. Assume the company's tax rate is 35 percent.

Debt: 5,000 6 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 105 percent of par: the bonds make semiannual payments.

Common Stock: 175,000 shares outstanding, selling for $58 per share; the beta is 1.10.

Market: 7 percent market risk premium and 5 percent risk-free.

a. Find the WACC.

2. (Answer using Excel) Finding the WACC: Titan Mining Corporation has 9.3 million shares of common stock outstanding and 260,000 6.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.20, and the bonds have 20 years to maturity and sell for 104 percent of par. The market risk premium is 7 percent, T-bills are yielding 3.5 percent and Titan Mining's tax rate is 35 percent.

a. What is the firm's market value capital structure?

b. If Titan Mining 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?

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## Q : Trade-off theory and pecking-order theory

Describe a specific business that seems to follow trade-off theory and another that follows pecking-order theory. Compare and contrast trade-off theory and pecking-order theory.