Cost of Capital. The total market value of Okefenokee Real Estate Company is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock currently is 1.5 and that the expected risk premium on the market is 10 percent. The Treasury bill rate is 4 percent.

a. What is the required rate of return on Okefenokee stock?

b. What is the beta of the company’s existing portfolio of assets? The debt is perceived to be virtually risk-free.

c. Estimate the weighted-average cost of capital assuming a tax rate of 40 percent.

d. Estimate the discount rate for an expansion of the company’s present business.

e. Suppose the company wants to diversify into the manufacture of rose-colored glasses.
The beta of optical manufacturers with no debt outstanding is 1.2. What is the required rate of return on Okefenokee’s new venture?