The total market value of the common stock of the Okefenokee Real Estate Company is $12.5 million, and the total value of its debt is $7.9 million. The treasurer estimates that the beta of the stock is currently 1.9 and that the expected risk premium on the market is 6%. The Treasury bill rate is 5%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. ces a. What is the required return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Estimate the company cost of capital. (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? (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 110. Estimate the required return on Okefenokee's new venture. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) a. Required return b. Cost of capital C. Discount rate d. Required return % % %
The total market value of the common stock of the Okefenokee Real Estate Company is $12.5 million, and the total value of its debt is $7.9 million. The treasurer estimates that the beta of the stock is currently 1.9 and that the expected risk premium on the market is 6%. The Treasury bill rate is 5%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. ces a. What is the required return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Estimate the company cost of capital. (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? (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 110. Estimate the required return on Okefenokee's new venture. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) a. Required return b. Cost of capital C. Discount rate d. Required return % % %
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Hw 9.
Transcribed Image Text:The total market value of the common stock of the Okefenokee Real Estate Company is $12.5 million, and the total value of its debt is
$7.9 million. The treasurer estimates that the beta of the stock is currently 1.9 and that the expected risk premium on the market is 6%.
The Treasury bill rate is 5%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax.
ces
a. What is the required return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
b. Estimate the company cost of capital. (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? (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 110. Estimate the required return on Okefenokee's new venture. (Do not round intermediate calculations. Enter
your answer as a percent rounded to 2 decimal places.)
a. Required return
b. Cost of capital
C.
Discount rate
d. Required return
%
%
%
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