Question
$7.9 million. The treasurer estimates that the beta of the stock is currently 1.9 and that the expected risk premium on the market is
$7.9 million. The treasurer estimates that the beta of the stock is currently 1.9 and that the expected risk premium on the market is 6%. The Treasury bill rate is 5%. 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Estimate the company cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. What is 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 spectacles. The beta of unleveraged optical manufacturers is 1.10. Estimate the required return on Okefenokee's new venture. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Answer is complete but not entirely correct. a. Required return 16.40 % b. Cost of capital 11.99 % C. Discount rate 11.99 % d. Required return 11.11 %
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