Reference no: EM132668025

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%.

ComponentScenario 1Scenario 2Cost of CapitalTax RateDebt$5,000,000.00$2,000,000.008%30%Preferred Stock1,200,000.002,200,000.0010% Common Stock1,800,000.003,800,000.0013% 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 AInitial Outlay$ -8,000,000.00Inflow year 11,020,000.00Inflow year 21,850,000.00Inflow year 31,960,000.00Inflow year 42,370,000.00Inflow year 52,550,000.00WACC?

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