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. .3555 should be entered as 35.55).) 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 1,960,000.00 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, 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
Dividend Policy
A dividend is a part of the profit paid to the shareholder in an organization. The management of the organization has the right to decide the policy for giving a dividend from the earnings to the shareholder. However, an organization is not in the obligation to declare a dividend for the investor. Dividend policy differs from organization to organization. As the management has the only authority to decide dividend rate, dividend amount, and time of dividend payout by considering all other elements that create an impact on the payment of a dividend.
Stocks And Dividends
Stock or equities are generally sold and bought in the Stock Exchange or which is popularly known as the stock market. Stocks are issued in the Stock Exchange for the sole purpose of raising funds for the Corporation or the company itself. Now since an individual has purchased a portion of the Corporation or company, he or she may claim to be a part of the earnings or profit of the company.
Please answer PART 2. Not PART 1.
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%
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?
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 1,960,000.00
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
Project A should be accepted
Project A should be rejected
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