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%.

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).)

Which capital structure shall Mr. Johnson choose to fund the new project? multiple choice

Scenario 1

Scenario 2

Part 2

Assume the new projects operating cash flows for the upcoming 5 years are as follows:

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

Project A should be rejected

\begin{tabular}{|l|c|c|c|c|c|c|} \hline & Scenario1Weight% & Scenario2Weight% & Scenario1WeightedCost & Scenario2WeightedCost & Cost of Capital & Tax Rate \\ \hline Debt & & & & & 8% & 30% \\ \hline Preferred Stock & & & & & 10% & \\ \hline Common Stock & & & & & 13% & \\ \hline Total & & & & & & \\ \hline \end{tabular} \begin{tabular}{|c|r|} \hline & \multicolumn{1}{|c|}{ Project A } \\ \hline \hline Initial Outlay & $6,200,000.00 \\ \hline \hline Inflow year 1 & 1,270,000.00 \\ \hline \hline Inflow year 2 & 1,750,000.00 \\ \hline \hline Inflow year 3 & 1,980,000.00 \\ \hline \hline Inflow year 4 & 2,160,000.00 \\ \hline \hline Inflow year 5 & 2,450,000.00 \\ \hline \hline WACC & ? \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline WACC (from Part 1) & \\ \hline NPV & \\ \hline IRR & \\ \hline Payback Method & \\ \hline \end{tabular}