Chapter 12 Problems Problem #1The Glendale Corp. is considering a real estate development project that will cost $5 million to undertake and is expected to produce annual inflows between $1 million...

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Chapter 12 Problems Problem #1The Glendale Corp. is considering a real estate development project that will cost $5 million to undertake and is expected to produce annual inflows between $1 million and $4 million for two years. Management feels that if the project turns out really well the inflows between $3 million in the first year and $4 million in the second. If things go very poorly, on the other hand, inflows of $1 million followed by $2.5 million are more likely. Develop a range of NPVs for the project if Glendale's cost of capital is 12%. Problem #2 If Glendale's management in the previous problem attaches a probability of .7 to the better outcome, what is the project's most likely (expected) NPV? Comment on the result of your calculations. Problem #5The Blazingame Corporation is considering a three-year project that has an initial cash outlay (C) of $175,000 and three cash inflows that are defined by the following independent probability distributions. All dollar figures are in thousands. Blazingame's cost of capital is 10% C1C2 $50$40$75$0 6080800.5 70120850.25 a. Estimate the project's most likely NPV using a point estimate of each cash flow. What is its probability? b. What are the best and worst possible NPV's? What are their probabilities? c. Choose a few outcomes at random, calculate their NPVs and the associated probabilities, and sketch the probability distribution of the project's NPV. Chapter 13 Questions Question #2Define the idea of capital structure and capital components. Why is capital structure important to the cost of capital concept? In many capital structure discussions, preferred stock is lumped with either debt or common equity. With respect to the cost of capital, however it's treated separately. Why? Question #5There's an issue of historical versus market value with respect to both the cost of capital components and the amounts of those components used in developing weights. We're willing to accept an approximation for the weights, but not for the cost/returns. Why? Problems Problem #2The Aztec Corporation has the following capital components and costs. Calculate Aztec's WACC. ComponentValueCost Debt$23,62512.00% Preferred Stock4,35013.5 Common equity52,27519.2 Problem #3Willerton Industries Inc. has the following balances in its capital accounts as of 12/31/X3: Long-Term Debt$65,000,000 Preferred Stock15,000,000 Common Stock40,000,000 Paid in excess15,000,000 Retained earnings37,500,000 Calculate Willerton's capital structure based on book values. Problem #6A relatively young firm has capital components valued at book and market and market component costs as follows. No new securities have been issued since the firm was originally capitilalized. Value ComponentMarket BookCost Debt $42,830$40,0008.50% Preferred Stock10,65010,00010.6 Common Equity65,74032,00025.3 a.Calculate the firm's capital structures and WACCs based on both book and market values, and compare the two. b. What appears to have happened to interest rates since the company was started? c. Does the firm seem to be successful? Why? d. What would be the implication of using a WACC basedon books as opposed to market values? In other words, what kinds of mistakes might management make by using the book values? Problem #24 The Longenes Company uses a target capital structure when calculating the cost of capital. The target structure and current component costs based on market conditions follow: ComponentMixCost Debt25%8% Preferred Stock1012 Common Equity6520 The firm expects to earn $20 million next year and plans to invest 18$ million in new capital projects. It generally pays dividends equal to 60% of earnings. Flotation costs are 10% for common and preferred stock. a. What is Longene's initial WACC? b. Where is the retained earnings breakout point in the MCC? (Round to the nearest $.1million.) c. What is the new WACC after the break? (Adjust the entire cost of equity for flotation costs.) Business Analysis Business Analysis 1You're the newly hired CFO of a small construction company. The privately held firm is capitalized with $2 million in owner's equity and $3 million in variable rate bank loans. The construction business is quite risky, so returns of 20% to 25% are normally demanded in equity investments. The bank is currently charging 14% on the firm's loans, but interest rates are expected to rise in the near future. Your boss, the owner, started his career as a carpenter and has an excellent grasp of day-to-day operations. However, he knows a little about finance. Business has been good lately, and several expansion projects are under consideration. A cash flow projection has been made for each. You're satisfied that these estimates are reasonable. The owner has called you in and confessed to being confused about the projects that are financially viable. Assuming the owner understands the concept of return on investment, write a brief memo explaining the ideas of IRR and cost of capital and how they can solve this problem. Don't get into the detailed mechanics of the calculations, but do use the figures given above to make a rough estimate of the company's cost of capital and use the result in your memo. Don't get into the detailed mechanics of the calculations, but do use the figures given above to make a rough estimate of the company's cost of capital and use the result in your memo.