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Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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
Transcribed Image Text:Part 1
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
Debt
Cost of Capital
8%
Scenario 1
Scenario 2
Tax Rate
$5,000,000.00
1,200,000.00
1,800,000.00
$8,000,000.00
$2,000,000.00
2,200,000.00
3,800,000.00
$8,000,000.00
30%
Preferred Stock
Common Stock
10%
13%
Total
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 Weighted Cost Cost of Capital
Scenario 2
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?
O Scenario 1.
O Scenario 2
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