FIN 419 Week 4 Apply Capital Structure and Project Assessment
1
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Part 1
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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%.
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Component
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Scenario 1
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Scenario 2
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Cost of Capital
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Tax Rate
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Debt
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$4,000,000.00
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$1,000,000.00
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8%
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30%
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Preferred Stock
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1,200,000.00
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1,500,000.00
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10%
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Common Stock
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1,000,000.00
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3,700,000.00
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13%
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Total
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$6,200,000.00
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$6,200,000.00
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1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).)
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1-b. Which capital structure shall Mr. Johnson choose to fund the new project?
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multiple choice 1
Scenario 1Â
Scenario 2
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Part 2
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Assume the new project’s operating cash flows for the upcoming 5 years are as follows:
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Project A
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Initial Outlay
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$ -6,200,000.00
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Inflow year 1
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1,270,000.00
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Inflow year 2
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1,750,000.00
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Inflow year 3
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1,980,000.00
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Inflow year 4
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2,160,000.00
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Inflow year 5
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2,450,000.00
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WACC
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?
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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).)
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2-b. Shall the company accept or reject this project based on the outcome using the net present value (NPV) method?
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multiple choice 2
Project A should be acceptedÂ
Project A should be rejected
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Answers
Status NEW
Posted 29 Oct 2020 06:10 PM
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file 1603995485-FIN 419 Week 4 Apply Capital Structure and Project Assessment.docx preview (236 words )
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