Question
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
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 | $1,000,000 | 8% | 30% |
| Preferred stock | 1,200,000 | 1,500,000 | 10% | |
| Common stock | 1,000,000 | 3,700,000 | 13% | |
| Total | $6,200,000 | $6,200,000 |
Complete the following, providing a full explanation:
| Component | Scenario 1 weight % | Scenario 2 weight % | Scenario 1 weighted cost | Scenario 2 weighted cost | Cost of capital | Tax rate |
|---|---|---|---|---|---|---|
| Debt | 64.52 | 16.13 | 8% | 30% |
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Financial Management Core Concepts
Authors: Raymond M Brooks
2nd edition
132671034, 978-0132671033
