The total market value of the common stock of the Okefenokee Real Estate Company is $7.5 million, and the total value of its debt is $4.9 milion. The treasurer estimates that the beta of the stock is currently 1.8 and that the expected risk premlum on the market is 9%. The Treasury bill rate is 4%. 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? (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 1.05. 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.)

The total market value of the common stock of the Okefenokee Real Estate Company is $7.5 million, and the total value of its debt is $4.9 milion. The treasurer estimates that the beta of the stock is currently 1.8 and that the expected risk premlum on the market is 9%. The Treasury bill rate is 4%. 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? (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 1.05. 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.)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

First 3 subparts were answered, need part D answered.

The total market value of the common stock of the Okefenokee Real Estate Company is $7.5 million, and the total value of Its debt is
$4.9 million. The treasurer estimates that the beta of the stock is currently 1.8 and that the expected risk premlum on the market is 9%.
The Treasury bill rate is 4%. 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? (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
b. Estlmate 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 expanslon of the company's present business? (Do not round Intermedlate 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 1.05. 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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