Titan Mining Corporation has 9.6 million shares of common stock outstanding and 400,000 6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $44 per share and has a beta of 1.3, and the bonds have 20 years to maturity and sell for 115 percent of par. The market risk premium is 8.4 percent, T-bills are yielding 4 percent, and Titan Mining's tax rate is 40 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?
Now Suppose your company needs $17 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 10 percent, but the flotation cost for debt is only 7 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.
c. What is your company's weighted average flotation cost, assuming all equity is raised externally?
d. What is the true cost of building the new assembly line after taking flotation costs into account?