Need help calculating this.
Part 1
Peter Johnson, the CFO of Homer Industries, Inc is t...
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Mathematics, 01.03.2021 17:50 chriscook4471
Need help calculating this.
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).)
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).)
2-b. Shall the company accept or reject this project based on the outcome using the net present value (NPV) method?
multiple choice 2
Project A should be accepted
Project A should be rejected
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