The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 1.00. Estimate the required return on Okefenokee's new venture. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Answer is complete but not entirely correct. a. Required return 13.80 % b. Cost of capital 9.61 % c. Discount rate 9.61 % d. Required return 12.00 %
The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 1.00. Estimate the required return on Okefenokee's new venture. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Answer is complete but not entirely correct. a. Required return 13.80 % b. Cost of capital 9.61 % c. Discount rate 9.61 % d. Required return 12.00 %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is
$7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%.
The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax.
a. What is the required return on Okefenokee stock?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
b. Estimate the company cost of capital.
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
c. What is the discount rate for an expansion of the company's present business?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical
manufacturers is 1.00. Estimate the required return on Okefenokee's new venture.
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
Answer is complete but not entirely correct.
a. Required return
13.80 %
b. Cost of capital
9.61 %
c. Discount rate
9.61✔ %
d. Required return
12.00 %
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