The total market value of the common stock of the Okefenokee Real Estate Company is $7.5 million, and the total value of its debt is $4.9 milion. The treasurer estimates that the beta of the stock is currently 1.8 and that the expected risk premlum on the market is 9%. 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? (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 1.05. 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.)
The total market value of the common stock of the Okefenokee Real Estate Company is $7.5 million, and the total value of its debt is $4.9 milion. The treasurer estimates that the beta of the stock is currently 1.8 and that the expected risk premlum on the market is 9%. 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? (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 1.05. 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.)
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter15: Capital Structure Decisions
Section: Chapter Questions
Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...
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First 3 subparts were answered, need part D answered.
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