Question 1
Part 1
Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company’s tax rate is 30%.
Component
Scenario 1
Scenario 2
Cost of Capital
Tax Rate
Debt
$4,000,000.00
$1,000,000.00
8%
30%
Preferred Stock
1,200,000.00
1,500,000.00
10%
Common Stock
1,000,000.00
3,700,000.00
13%
Total
$6,200,000.00
$6,200,000.00
1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).)
Scenario 1 Weight %
Scenario 2 Weight %
Scenario 1 Weighted Cost
Scenario 2 Weighted Cost
Cost of Capital
Tax Rate
Debt
Preferred Stock
Common Stock
Total
1-b. Which capital structure shall Mr. Johnson choose to fund the new project?
multiple choice 1
Scenario 1
Scenario 2
Part 2
Assume the new project’s operating cash flows for the upcoming 5 years are as follows:
Project A
Initial Outlay
$ -6,200,000.00
Inflow year 1
1,270,000.00
Inflow year 2
1,750,000.00
Inflow year 3
1,980,000.00
Inflow year 4
2,160,000.00
Inflow year 5
2,450,000.00
WACC
?
2-a. What are the WACC (restated from Part 1), NPV, IRR, and payback years of this project? (Negative values should be entered with a minus sign. All answers should be entered rounded to 2 decimal places. Your answers for WACC and IRR should be whole percentages (e.g. .3555 should be entered as 35.55).)
WACC (from Part 1)
NPV
IRR
Payback Method
2-b. Shall the company accept or reject this project based on the outcome using the net present value (NPV) method?
ANSWER WILL BE SENT BY EMAIL.
