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2. True/false* True or false? a. The company cost of capital is the correct discount rate for all projects because the high risks of some
2. True/false* True or false? a. The company cost of capital is the correct discount rate for all projects because the high risks of some projects are offset by the low risk of other projects. b. Distant cash flows are riskier than near-term cash flows. Therefore, long-term projects require higher risk-adjusted discount rates. c. Adding fudge factors to discount rates undervalues long-lived projects compared with quick-payoff projects. 3. Company cost of capital Quark Productions ("Give your loved one a quark today.") uses its company cost of capital to evaluate all projects. Will it underestimate or overestimate the value of high-risk projects? 4. Company cost of capital The total market value of the common stock of the 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 is currently 1.5 and that the expected risk premium on the market is 6%. 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? b. Estimate the company cost of capital. c. What is the discount rate for an expansion of the company's present business? d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 1.2. Estimate the required return on Okefenokee's new venture
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