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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 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. .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

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