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?
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 | $5,000,000.00 | $2,000,000.00 | 8% | 30% |
| 1,200,000.00 | 2,200,000.00 | 10% | ||
| Common Stock | 1,800,000.00 | 3,800,000.00 | 13% | |
| Total | $8,000,000.00 | $8,000,000.00 | ||
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
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Scenario 1
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Scenario 2
Part 2
Assume the new project’s operating cash flows for the upcoming 5 years are as follows:
| Project A | |
|---|---|
| Initial Outlay | $ -8,000,000.00 |
| Inflow year 1 | 1,020,000.00 |
| Inflow year 2 | 1,850,000.00 |
| Inflow year 3 | 1,960,000.00 |
| Inflow year 4 | 2,370,000.00 |
| Inflow year 5 | 2,550,000.00 |
| WACC | ? |
2-a. What are the WACC (restated from Part 1), NPV,
2-b. Shall the company accept or reject this project based on the outcome using the
multiple choice 2
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Project A should be accepted
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Project A should be rejected
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