Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 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?