Please, help with understanding the following.
Question:
Titan Mining Corporation has 9 million shares of equity outstanding and 1,200,000 8.5 per cent semi-annual bonds outstanding, par value £100 each. The equity currently sells for £34 per share and has a beta of 1.20, and the bonds have 15 years to maturity and sell for 93 per cent of par. The market risk premium is 10 per cent, T-bills are yielding 5 per cent, and Titan Mining's tax rate is 28 per cent.
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?
Solution:
Step 1. Find the cost of equality using the CAPM:
RE = 0.05 + 1.20(0.10) = 0.17
Step 2. The cost of debt is the YTM of the bonds. Therefore:
P0= £93 = £4.25(PVIFAR%,30) + £100(PVIFR%,30)
R = 4.69%
YTM = 4.69% × 2 = 9.38%
Step 3. Find the after-taxcost of debt is:
[FONT="]RD= (1 – .28)(.0938) = .0675 or 6.75%
[/FONT]Step 4. Calculate the WACC:
[FONT="]WACC =.1700(.7328) + .0675 (.2672) = .1426 or 14.26%
[/FONT]
Problem: I cannot understand Step 2. Where does £93 come from? Where does £4.25 come from? How did they calculate the entire equation with PVIFA? Please help and let me know if you have any questions!
Question:
Titan Mining Corporation has 9 million shares of equity outstanding and 1,200,000 8.5 per cent semi-annual bonds outstanding, par value £100 each. The equity currently sells for £34 per share and has a beta of 1.20, and the bonds have 15 years to maturity and sell for 93 per cent of par. The market risk premium is 10 per cent, T-bills are yielding 5 per cent, and Titan Mining's tax rate is 28 per cent.
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?
Solution:
Step 1. Find the cost of equality using the CAPM:
RE = 0.05 + 1.20(0.10) = 0.17
Step 2. The cost of debt is the YTM of the bonds. Therefore:
P0= £93 = £4.25(PVIFAR%,30) + £100(PVIFR%,30)
R = 4.69%
YTM = 4.69% × 2 = 9.38%
Step 3. Find the after-taxcost of debt is:
[FONT="]RD= (1 – .28)(.0938) = .0675 or 6.75%
[/FONT]Step 4. Calculate the WACC:
[FONT="]WACC =.1700(.7328) + .0675 (.2672) = .1426 or 14.26%
[/FONT]
Problem: I cannot understand Step 2. Where does £93 come from? Where does £4.25 come from? How did they calculate the entire equation with PVIFA? Please help and let me know if you have any questions!