Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The total market value of Okefenokee Real Estate Company's equity is $12 million, and the total value of its debt is $8 million. The treasurer

The total market value of Okefenokee Real Estate Company's equity is $12 million, and the total value of its debt is $8 million. The treasurer estimates that the beta of the stock currently is 1.4 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%.

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

Required rate of return ______%

b. What is the beta of the companys existing portfolio of assets? The debt is perceived to be virtually risk-free. (Round your answer to 2 decimal places.)

Weighted-average beta ______

c. Estimate the weighted-average cost of capital assuming a tax rate of 35%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

WACC _______%

d. Estimate the discount rate for an expansion of the companys present business. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Discount rate _______%

e. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.6. What is the required rate of return on Okefenokees new venture? (You should assume that the risky project will not enable the firm to issue any additional debt.)

Required rate of return _______%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Statement Analysis

Authors: Charles H. Gibson

13th International Edition

1133189407, 9781133189404

More Books

Students also viewed these Finance questions

Question

Draft a proposal for a risk assessment exercise.

Answered: 1 week ago