Corporate Finance: **Kindly provide workings and clear answers.
Question 7:
(a) The total market value of the common stock of the OKF Real Estate Company is RM6 million,
and the total value of its debts is RM4 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 that OKF debt is risk-free and
the company pays 30% corporate tax.
(i) What is the required return on OKF stock?
(ii) Estimate the company's cost of capital.
(iii) What is the discount rate of an expansion of the company's present business?
(iv) Suppose the company wants to diversify into manufacturing of rose-colour spectacles. The beta of unlevered optical manufacturers is 1.2.
Estimate the required return on OKF's new venture.