FIN 3403 Exam 4 (Extra Problems)

3. Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of preferred stock outstanding that pays a 9% annual dividend and 210,000, 10% semiannual bonds outstanding. The common stock currently sells for $34 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% of par. The market risk premium is 11.5%, T-bills are yielding 7.5%, and the firm's tax rate is 32%. 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?

WACC = (E/V)RE + (P/V)RP + (D/V)RD(1-TC) E= 14M x $34 = $476M P= 900,000 x $80 = $72M D= (210,000/1,000) x $910 = $191,000 V=E+P+D = 548,191,000 B=1.15 MRP=11.5% Rf=TBill=7.5% Tax Rate=32% RE = Rf+B(Rm-Rf) = 0.075+1.15(0.115-0.075) = 12.1% RP = D1/P0 = 7.2/80 = 9% RD = YTM (PV=-910, PMT=50, FV=1,000) = 11.2% WACC = (476M/548.191M)12.1% + (72M/548.191M)9% + (191,000/548.191M)11.2%(1-0.32) = 11.69%

2. The City Street Corporation's common stock has a beta of 1.2. The risk-free rate is 3.5% and the expected return on the market is 13 percent. What is the firm's cost of equity?

Cost of Equity: Re = ERf + B(ERm - ERf) Re = 0.035 + 1.2(0.13-0.035) Re = 0.035 + 1.2(0.095) Re = 0.149 OR 14.9%

1. Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 per share. What is the bank's cost of preferred stock?

Cost of Preferred Stock: Rp = D1/P0 Rp = 5/92 Rp = 0.0543 OR 5.43%

4. Kelso Electric is debating whether to use a leveraged or an unleveraged capital structure. The all-equity capital structure would consist of 40,000 shares of stock. The debt and equity option would consist of 25,000 shares of stock plus $280,000 of debt with an interest rate of 7%. What is the break-even level of EBIT between these two options? The company's tax rate is 35%.

EBIT(1-T)/#shares = (EBIT - int exp)(1-T)/#shares EBIT(1-0.35)/40,000 = (EBIT - 19,600)(1-0.35)/25,000 .65EBIT/40,000 = (.65EBIT - 12,740)/25,000 .65EBIT = 1.04EBIT - 20,384 .39EBIT = 20,384 EBIT = 52,266.67