Does this tool only replace the magic string from the source code or will it also replace directory names?

For example if I had a sub-folder in my project named "magic_ProjectName_magic/src" will it prompt me to change the name of the sub-folder?

It will replace strings in folder names, file names and in any text file (as identified as text by GitHub).

You can see an example here: https://github.com/Zoltu/Templates.GradlePlugin.Groovy/tree/...

In that case, both the folder name and the file name have magic strings in them, so both will have a replacement prompt.