Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 companys 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).)

1-b. Which capital structure shall Mr. Johnson choose to fund the new project?

  • Scenario 1

  • Scenario 2

Part 2

Assume the new projects 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).)

2-b. Shall the company accept or reject this project based on the outcome using the net present value (NPV) method?

  • Project A should be accepted

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Entrepreneurial Finance

Authors: Steven Rogers

4th Edition

1260461440, 978-1260461442

More Books

Students also viewed these Finance questions