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**Title: Capital Structure and Project Assessment Decision Making** **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 | $5,000,000.00 | $2,000,000.00 | 8% | 30% | | Preferred Stock | $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 | $8,000,000.00 | | | **1-a.** Complete the table below to determine the WACC for each of the two capital structure scenarios. *(Enter your answer as a whole percentage rounded to 2 decimal places (e.g., 35.55% should be entered as 35.55).)* | Component | Scenario 1 Weight % | Scenario 2 Weight % | Scenario 1 Weighted Cost | Scenario 2 Weighted Cost | Tax Rate | |-----------------|---------------------|---------------------|--------------------------|--------------------------|----------| | Debt | | | | | 30% | | Preferred Stock | | | | | | | Common Stock | | | | | | | Total | 0.00% | 0.00% | | | | **1-b.** Which capital structure shall Mr. Johnson choose to fund the new project? **Capital Structure and Project Assessment Decision** **1-b.** Which capital structure shall Mr. Johnson choose to fund the new project? - Scenario 1 - Scenario 2 --- **Part 2** Assume the new project's operating cash flows for the upcoming 5 years are as follows: | Project A | |-----------------| | **Initial Outlay** | **$ -8,000,000.00** | | **Inflow Year 1** | **1,020,000.00** | | **Inflow Year 2** | **1,850,000.00** | | **Inflow Year 3** | **1,860,000.00** | | **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, 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).* | WACC (from Part 1) | | |--------------------|--| | NPV | | | IRR | | | Payback Method | | No graphs or diagrams are included in this section.

**Title: Capital Structure and Project Assessment Decision Making** **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 | $5,000,000.00 | $2,000,000.00 | 8% | 30% | | Preferred Stock | $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 | $8,000,000.00 | | | **1-a.** Complete the table below to determine the WACC for each of the two capital structure scenarios. *(Enter your answer as a whole percentage rounded to 2 decimal places (e.g., 35.55% should be entered as 35.55).)* | Component | Scenario 1 Weight % | Scenario 2 Weight % | Scenario 1 Weighted Cost | Scenario 2 Weighted Cost | Tax Rate | |-----------------|---------------------|---------------------|--------------------------|--------------------------|----------| | Debt | | | | | 30% | | Preferred Stock | | | | | | | Common Stock | | | | | | | Total | 0.00% | 0.00% | | | | **1-b.** Which capital structure shall Mr. Johnson choose to fund the new project? **Capital Structure and Project Assessment Decision** **1-b.** Which capital structure shall Mr. Johnson choose to fund the new project? - Scenario 1 - Scenario 2 --- **Part 2** Assume the new project's operating cash flows for the upcoming 5 years are as follows: | Project A | |-----------------| | **Initial Outlay** | **$ -8,000,000.00** | | **Inflow Year 1** | **1,020,000.00** | | **Inflow Year 2** | **1,850,000.00** | | **Inflow Year 3** | **1,860,000.00** | | **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, 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).* | WACC (from Part 1) | | |--------------------|--| | NPV | | | IRR | | | Payback Method | | No graphs or diagrams are included in this section.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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**Title: Capital Structure and Project Assessment Decision Making** **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 | $5,000,000.00 | $2,000,000.00 | 8% | 30% | | Preferred Stock | $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., 35.55% should be entered as 35.55).)* | Component | Scenario 1 Weight % | Scenario 2 Weight % | Scenario 1 Weighted Cost | Scenario 2 Weighted Cost | Tax Rate | |-----------------|---------------------|---------------------|--------------------------|--------------------------|----------| | Debt | | | | | 30% | | Preferred Stock | | | | | | | Common Stock | | | | | | | Total | 0.00% | 0.00% | | | | **1-b.** Which capital structure shall Mr. Johnson choose to fund the new project?
Transcribed Image Text:**Title: Capital Structure and Project Assessment Decision Making** **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 | $5,000,000.00 | $2,000,000.00 | 8% | 30% | | Preferred Stock | $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 | $8,000,000.00 | | | **1-a.** Complete the table below to determine the WACC for each of the two capital structure scenarios. *(Enter your answer as a whole percentage rounded to 2 decimal places (e.g., 35.55% should be entered as 35.55).)* | Component | Scenario 1 Weight % | Scenario 2 Weight % | Scenario 1 Weighted Cost | Scenario 2 Weighted Cost | Tax Rate | |-----------------|---------------------|---------------------|--------------------------|--------------------------|----------| | Debt | | | | | 30% | | Preferred Stock | | | | | | | Common Stock | | | | | | | Total | 0.00% | 0.00% | | | | **1-b.** Which capital structure shall Mr. Johnson choose to fund the new project?
**Capital Structure and Project Assessment Decision** **1-b.** Which capital structure shall Mr. Johnson choose to fund the new project? - Scenario 1 - Scenario 2 --- **Part 2** Assume the new project's operating cash flows for the upcoming 5 years are as follows: | Project A | |-----------------| | **Initial Outlay** | **$ -8,000,000.00** | | **Inflow Year 1** | **1,020,000.00** | | **Inflow Year 2** | **1,850,000.00** | | **Inflow Year 3** | **1,860,000.00** | | **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, 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).* | WACC (from Part 1) | | |--------------------|--| | NPV | | | IRR | | | Payback Method | | No graphs or diagrams are included in this section.
Transcribed Image Text:**Capital Structure and Project Assessment Decision** **1-b.** Which capital structure shall Mr. Johnson choose to fund the new project? - 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** | **$ -8,000,000.00** | | **Inflow Year 1** | **1,020,000.00** | | **Inflow Year 2** | **1,850,000.00** | | **Inflow Year 3** | **1,860,000.00** | | **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, 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).* | WACC (from Part 1) | | |--------------------|--| | NPV | | | IRR | | | Payback Method | | No graphs or diagrams are included in this section.
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