Ophir Mining Corporation has 6.3 million ordinary shares outstanding; 350000, 5.8% preference shares outstanding, and 150000, 7.1%...

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Ophir Mining Corporation has 6.3 million ordinary sharesoutstanding; 350000, 5.8% preference
shares outstanding, and 150000, 7.1% half-yearly bondsoutstanding, par value $1000 each. The
ordinary shares currently sell for $74 and have a beta of 1.09;the preference shares sell for $107;
and the bonds have 20 years to maturity and sell for 109% ofpar. The market risk premium is
6.8%; government bonds are yielding 4.3%; and Ophir Mining’s taxrate is 30%. The book value
of one preference share is $100.
a.What is the firm’s market-value capital structure?
b. If Ophir Mining is evaluating a new investment project thathas the same risk as the firm’s typical project, what rate shouldthe firm use to discount the project’s cash flows under a classicaltax system?
show steps, plz, i will rate PS. especially the YTM steps.

Answer & Explanation Solved by verified expert

3.8 Ratings (426 Votes)

cost of equity = 4.3% + 1.09*6.8%

cost of preferred shares = 5.8/107

cost of bond: FV = 1000, N = 40, PV = -1090, PMT = 7.1%/2 * 1000 = 35.5

use rate function in Excel with the inputs above and multiply by 2*(1 - 0.30)

after tax cost of debt = 4.412%

	market value	weight	cost	weight*cost
common	466,200,000.00	69.8793%	11.712%	0.0818
debt	163,500,000.00	24.5072%	4.412%	0.0108
pref stock	37,450,000.00	5.6134%	5.421%	0.0030
	-
total	667,150,000.00			9.5697%
	WACC = 9.57%

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Transcribed Image Text

Ophir Mining Corporation has 6.3 million ordinary sharesoutstanding; 350000, 5.8% preferenceshares outstanding, and 150000, 7.1% half-yearly bondsoutstanding, par value $1000 each. Theordinary shares currently sell for $74 and have a beta of 1.09;the preference shares sell for $107;and the bonds have 20 years to maturity and sell for 109% ofpar. The market risk premium is6.8%; government bonds are yielding 4.3%; and Ophir Mining’s taxrate is 30%. The book valueof one preference share is $100.a.What is the firm’s market-value capital structure?b. If Ophir Mining is evaluating a new investment project thathas the same risk as the firm’s typical project, what rate shouldthe firm use to discount the project’s cash flows under a classicaltax system?show steps, plz, i will rate PS. especially the YTM steps.