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-tax cost of debt is:
Rd = (1 – .28)(.0938) = .0675 or 6.75% Step 4. Calculate the WACC:
WACC = .1700(.7328) + .0675 (.2672) = .1426 or 14.26%
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!
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93 is the current market price of the outstanding bonds. The bond pays a semi-annual coupon of 8.5/2 = 4.25 and a face amount of 100 on the maturity date. All step 2 is doing is finding the bond equivalent yield of the remaining payments.
Now, I am trying to solve for PVIFA and PVIF but I have no idea how to do this. Is there some specific formula for those? How can I find them? I have spent 2 days over this problem. Is it time to call SOS?