FIN419T Week 4 Apply Assessment SCORE 90 PERCENT

Question 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


$4,000,000.00


$1,000,000.00


8%


30%

Preferred Stock


1,200,000.00


1,500,000.00


10%


 

Common Stock


1,000,000.00


3,700,000.00


13%


 

Total


$6,200,000.00


$6,200,000.00


 


 

 

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 %


Scenario 1 Weighted Cost


Scenario 2 Weighted Cost


Cost of Capital


Tax Rate

Debt


Preferred Stock


Common Stock


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


$ -6,200,000.00

Inflow year 1


1,270,000.00

Inflow year 2


1,750,000.00

Inflow year 3


1,980,000.00

Inflow year 4


2,160,000.00

Inflow year 5


2,450,000.00

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


 

2-b. Shall the company accept or reject this project based on the outcome using the net present value (NPV) method?

 ANSWER WILL BE SENT BY EMAIL.