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Question - Weighted Average Cost of Capital - Titan Mining Corporation has 5 million shares of common stock outstanding and 100,000 6.5% semiannual bonds outstanding, par value (also book value) $1,000 each. The common stock currently sells for $41 per share, has a book value per share of $15, and has an equity beta of 1.05. The bonds have 15 years to maturity and currently sell for 105 percent of par. The market risk premium is 7 percent, current 90-day T-bills are yielding 2.5 percent, and the company's tax rate is 40 percent.
a) What is the firm's book value and market value capital structure? Calculate the percentage of debt and equity using both book value and market value. Which structure is more relevant for estimating Weighted Average Cost of Capital and why?
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?
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