Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental...

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Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow Probability $80,000 0.2 85,000 100,000 0.2 0.2 115,000 120,000 0.2 0.2 Hillcrest Apartments Yearly Aftertax Cash Inflow Probability $85,000 0.2 90,000 0.3 100,000 110,000 0.4 0.1 a. Find the expected value of the cash flow for each apartment complex. (Enter the answers in thousands.) Windy Acres Hillcrest Apartments Expected cash flow $ $ b. What is the coefficient of variation for each apartment complex? (Do not round Intermediate calculations. Round the final answers to 4 decimal places.) Coefficient of variation Windy Acres Hillcrest Apartments c. Which apartment complex has more risk? Windy Acres O Hillcrest Apartments Valvano Publishing Company is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Washburn, the vice- president of finance, has given you the following information and asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with an 6.5 percent coupon rate and a convertible bond with a 4.5 percent rate. The firm has been informed by its Investment dealer, Dean, Smith, and Company, that bonds of equal risk and credit rating are now selling to yield 7.5 percent. The common stock has a price of $74.0 and an expected dividend (D1) of $2.20 per share. The firm's historical growth rate of earnings and dividends per share has been 9.2 percent, but security analysts on Bay Street expect this growth to slow to 12 percent in the future. The preferred stock is selling at $70 per share and carries a dividend of $8.50 per share. The corporate tax rate is 30 percent. The flotation costs are 3 percent of the selling price for preferred stock. The optimum capital structure for the firm seems to be 40 percent debt, 10 percent preferred stock, and 50 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. (Round the final answers to 2 decimal places.) Debt (Kd) Preferred stock (Kp) Common equity (Ke) Cost of capital % b. Calculate the weighted average cost of capital. (Round Intermediate calculations to 2 decimal places. Round the final answers to 2 decimal places.) Debt (Kd) Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) Weighted cost % Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow Probability $80,000 0.2 85,000 100,000 0.2 0.2 115,000 120,000 0.2 0.2 Hillcrest Apartments Yearly Aftertax Cash Inflow Probability $85,000 0.2 90,000 0.3 100,000 110,000 0.4 0.1 a. Find the expected value of the cash flow for each apartment complex. (Enter the answers in thousands.) Windy Acres Hillcrest Apartments Expected cash flow $ $ b. What is the coefficient of variation for each apartment complex? (Do not round Intermediate calculations. Round the final answers to 4 decimal places.) Coefficient of variation Windy Acres Hillcrest Apartments c. Which apartment complex has more risk? Windy Acres O Hillcrest Apartments Valvano Publishing Company is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Washburn, the vice- president of finance, has given you the following information and asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with an 6.5 percent coupon rate and a convertible bond with a 4.5 percent rate. The firm has been informed by its Investment dealer, Dean, Smith, and Company, that bonds of equal risk and credit rating are now selling to yield 7.5 percent. The common stock has a price of $74.0 and an expected dividend (D1) of $2.20 per share. The firm's historical growth rate of earnings and dividends per share has been 9.2 percent, but security analysts on Bay Street expect this growth to slow to 12 percent in the future. The preferred stock is selling at $70 per share and carries a dividend of $8.50 per share. The corporate tax rate is 30 percent. The flotation costs are 3 percent of the selling price for preferred stock. The optimum capital structure for the firm seems to be 40 percent debt, 10 percent preferred stock, and 50 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. (Round the final answers to 2 decimal places.) Debt (Kd) Preferred stock (Kp) Common equity (Ke) Cost of capital % b. Calculate the weighted average cost of capital. (Round Intermediate calculations to 2 decimal places. Round the final answers to 2 decimal places.) Debt (Kd) Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) Weighted cost %