The total market value of the equity of Okefenokee Condos is $3 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 1.1 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a whole percent. b. Estimate the WACC assuming a tax rate of 21%. Note: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Estimate 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 glasses. The beta of optical manufacturers with no debt outstanding is 1.3. What is the required rate of return on Okefenokee's new venture? (You should assume that the risky project will not enable the firm to issue any additional debt.) Note: Do not round intermediate calculations. Enter your answer as a whole percent. a. Required rate of return b. WACC c. Discount rate d. Required rate of return % % % %
The total market value of the equity of Okefenokee Condos is $3 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 1.1 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a whole percent. b. Estimate the WACC assuming a tax rate of 21%. Note: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Estimate 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 glasses. The beta of optical manufacturers with no debt outstanding is 1.3. What is the required rate of return on Okefenokee's new venture? (You should assume that the risky project will not enable the firm to issue any additional debt.) Note: Do not round intermediate calculations. Enter your answer as a whole percent. a. Required rate of return b. WACC c. Discount rate d. Required rate of return % % % %
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 equity of Okefenokee Condos is $3 million, and the total value of its debt is $2 million. The treasurer
estimates that the beta of the stock currently is 1.1 and that the expected risk premium on the market is 10%. The Treasury bill rate is
5%, and investors believe that Okefenokee's debt is essentially free of default risk.
a. What is the required rate of return on Okefenokee stock?
Note: Do not round intermediate calculations. Enter your answer as a whole percent.
b. Estimate the WACC assuming a tax rate of 21%.
Note: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
c. Estimate 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 glasses. The beta of optical manufacturers with no
debt outstanding is 1.3. What is the required rate of return on Okefenokee's new venture? (You should assume that the risky
project will not enable the firm to issue any additional debt.)
Note: Do not round intermediate calculations. Enter your answer as a whole percent.
a. Required rate of return
b. WACC
c. Discount rate
d. Required rate of return
%
%
%
%
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