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 million. 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 expanslon of the company's present business? (Do not round Intermediate calculatlons. 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.) a. Required return b. Cost of capital c. Discount rate d. Required return
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 million. 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 expanslon of the company's present business? (Do not round Intermediate calculatlons. 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.) a. Required return b. Cost of capital c. Discount rate d. Required return
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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I have parts A-c figured out. I asked for part D required return. The answer I asked here didn't answer that. I have attached the answer I was given as well as the original question.
Transcribed Image Text: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 million. 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. Estlmate 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 expanslon of the company's present business? (Do not round Intermedlate 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.)
a. Required return
b. Cost of capital
%
C.
Discount rate
%
d. Required return
Transcribed Image Text:Expert Answer
Step 1
As the student has asked the 4th parts. Therefore, I'm answering the 4th part only.
Required return represents the rate of return required by the company in a project.
Step 2
Calculation of required return:
Levered beta for the venture = unlevered beta x (I+ D/E) *
(1- tаx гate)
= 1.05 x (I + 4.9/7. 5)
= 1.74
Cost of equity = 4% + 1. 74 x 9%
= 19.62%
Cost of capital = 39.52% x 4% x (1 - 0%)+ 60. 48% x 19.62%
= 13.45%
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