EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 13, Problem 11QP
a)
Summary Introduction
To compute: The required
b)
Summary Introduction
To compute: The WACC (weighted average cost of capital) of the company.
c)
Summary Introduction
To compute: The rate of discount for an expansion of firm’s current business.
d)
Summary Introduction
To compute: The required rate of return of company O’s novel venture.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
he total market value of the equity of Okefenokee Condos is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock currently is 2.0 and that the expected risk premium on the market is 5%. The Treasury bill rate is 3%, and investors believe that Okefenokee's debt is essentially free of default risk.
a. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.)
b. Estimate the WACC assuming a tax rate of 21%. (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. (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 2.2. What is the…
The total market value of the equity of Okefenokee Condos is $12 million, and the total value of its debt is $8 million. The treasurer
estimates that the beta of the stock currently is 1.3 and that the expected risk premium on the market is 10%. The Treasury bill rate is
3%, 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 1.5.…
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.
What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.)
Estimate the WACC assuming a tax rate of 21%.(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Estimate 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.)
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…
Chapter 13 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The total market value of the equity of Okefenokee Condos is $8 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 0.6 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. What is the required rate of return on Okefenokee stock? Note: Do not round intermediatearrow_forwardB. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 5.2 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability Return a. 0.05 0.50 0.40 0.05 -5 3 7 8 % % % % The investment's expected return is ___%.arrow_forwardOther relevant information about the company follows: The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent. Required: Answer the following question given the information above and from the photo attached 1. What is the estimated Internal Rate of Return (IRR) of the project? NO EXCEL SPREADSHEETS SHOW FULL WORKINGS WITHOUT EXCELarrow_forward
- B. J. Gautney Enterprises is evaluating a security. One - year Treasury bills are currently paying 3.0 percent. Calculate the investment's expected return and itsstandard deviation. Should Gautney invest in this security?Probability,ReturnProbability,Return0.20,-6%0.40, 1%0.20, 7%0.20, 8%arrow_forwardCH The total market value of the equity of Okefenokee Condos is $12 million, and the total value of its debt is $8 million. The treasurer estimates that the beta of the stock currently is 0.5 and that the expected risk premium on the market is 6%. 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? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Estimate the WACC assuming a tax rate of 21%. (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. (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 1.5. What is…arrow_forward(Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 3.9 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability Return 0.20 −5 % 0.50 4 % 0.10 5 % 0.20 8 % (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. The investment's expected return is enter your response here%. (Round to two decimal places.) b. the investment's standard devation is? round 2 decimal places c. should gautney invest in this security?arrow_forward
- Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 2.0 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability Return 0.20 −7 % 0.30 1 % 0.30 3 % 0.20 7 %arrow_forward(Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.6 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Return -4% 1% 6% 0.05 8% (Click on the icon in order to copy its contents into a spreadsheet.) Probability 0.05 0.35 0.55 a. The investment's expected return is 3.85%. (Round to two decimal places.) b. The investment's standard deviation is%. (Round to two decimal places.) Carrow_forward(Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.3 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability Return 0.05 −4 % 0.50 1 % 0.40 7 % 0.05 8 % (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. The investment's expected return is enter your response here %. (Round to two decimal places.) Part 2 b. The investment's standard deviation is enter your response here %. (Round to two decimal places.) Part 3 c. Should Gautney invest in this security? (Select the best choice below.) A. No. B. J. Gautney Enterprises should not invest in this investment because the return is lower than the Treasury bill and the level of risk higher than the Treasury bill. B. Yes. B. J.…arrow_forward
- The total market value of the equity of Okefenokee Condos is $8 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 0.5 and that the expected risk premium on the market is 12%. The Treasury bill rate is 3%, and investors believe that Okefenokee's debt is essentially free of default risk. a. Estimate the WACC assuming a tax rate of 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Estimate 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.) c. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.0. 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…arrow_forwardIf the 10 year government bond rate is 2.78% and the long term return on the market as proxied by the ASX is 5.85%, assuming the beta for WBC is 1.26 and for CBA is 1.23, use the Capital Asset Pricing Model (CAPM) to find the expected returns for WBC and CBA.arrow_forwardb. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate band. The current real risk-free rate is 5%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.03 (t-1) %. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Rate 0.83% 1.03 1.35 1.73 Corporate Bond Yield Spread = DRP + LP U.S. Treasury AAA corporate 0.20% AA corporate 0.52 A corporate 0.90 What yield would you predict for each of these two investments? Round your answers to three decimal places, 12-year Treasury yield: 7-year Corporate yield: % %arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Internal Rate of Return (IRR); Author: The Finance Storyteller;https://www.youtube.com/watch?v=aS8XHZ6NM3U;License: Standard Youtube License