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).)
Senario 1 weight % Senario 2 Weight% Senario 1 Weighted Cost Senario 2 weight cost Cost of capital Tax Rate
Debt 64.52 16.13 8% 30%
Preferred Stock 19.35 24.19 10%
Common Stock 16.13 59.68 13%
Total 100.00 100.00
I completed the weights, those were easy but I have been looking at videos on how to calculate WAAC but I am not getting how to accurately come up with the senario 1 and 2 weighted cost for debt, preferred stock, and common stock above. Any help you could provide with a formula explaining how each item gets plugged into the formula would be appreciated.
Part two is
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?