The total market value of the common stock of the Okefenokee Real Estate Company is $8 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 6%. The Treasury bill rate is 2%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 2. Estimate the required return on Okefenokee's new venture.
The total market value of the common stock of the Okefenokee Real Estate Company is $8 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 6%. The Treasury bill rate is 2%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 2. Estimate the required return on Okefenokee's new venture.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The total market value of the common stock of the Okefenokee Real Estate Company is $8 million, and the
total value of its debt is $4 million. The treasurer estimates that the beta of the stock is currently 1.5 and
that the expected risk premium on the market is 6%. The Treasury bill rate is 2%. Assume for simplicity that
Okefenokee debt is risk-free and the company does not pay tax.
Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of
unleveraged optical manufacturers is 2.
Estimate the required return on Okefenokee's new venture.
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