Question

# How I can compute this calculations

__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).)**

Scenario 1 Weight % Scenario 2 Weight % Scenario 1 Weighted Cost Scenario 2 Weighted Cost Cost of Capital Tax Rate

Debt 8% 30%

Preferred Stock 10%

Common Stock 13%

Total

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