Homework Help is Here – Start Your Trial Now!
Business
Finance
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).)   Scenario 1 weight % Scenario 2 weight % Scenario1 weighted cost Scenario 2 weighted cost  cost of capital tax rate Dept ? ? ? ? 8% 30% Preferred stock ? ? ? ? 10%   Common stock ? ? ? ? 13%   Total ? ? ? ?       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 $ -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).) WACC (from part 1) ? NPV ? IRR ? Payback method

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).)   Scenario 1 weight % Scenario 2 weight % Scenario1 weighted cost Scenario 2 weighted cost  cost of capital tax rate Dept ? ? ? ? 8% 30% Preferred stock ? ? ? ? 10%   Common stock ? ? ? ? 13%   Total ? ? ? ?       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 $ -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).) WACC (from part 1) ? NPV ? IRR ? Payback method

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
Problem 1PS
See similar textbooks
icon
Related questions
Question
100%

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).)

  Scenario 1 weight % Scenario 2 weight % Scenario1 weighted cost Scenario 2 weighted cost  cost of capital tax rate
Dept ? ? ? ? 8% 30%
Preferred stock ? ? ? ? 10%  
Common stock ? ? ? ? 13%  
Total ? ? ? ?    

 

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 $ -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).)

WACC (from part 1) ?
NPV ?
IRR ?
Payback method ?
 

 

Expert Solution
Step 1

Net Present Value(NPV) is excess of present value(PV) of cash inflows over PV of cash outlay of proposal.

IRR is rate that discounts NPV to zero. At IRR, PV of cash inflows & outlay becomes equal. 

trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 6 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Dividends
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS