PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 9, Problem 4PS
Company cost of capital The total market value of the common stock of the Okefenokee Real Estate Company is $6 million, and the total value of its debt is $4 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 for simplicity that Okefenokee debt is risk-free and the company does not pay tax.
- a. What is the required return on Okefenokee stock?
- b. Estimate the company cost of capital.
- c. What is the discount rate for an expansion of the company’s present business?
- d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 1.2. Estimate the required return on Okefenokee’s new venture.
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Students have asked these similar questions
The total market value of the common stock
of the Okefenokee Real Estate Company is $8
million, and the total value of its debt is $4
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 2%. Assume for
simplicity that Okefenokee debt is risk-free
and the company does not pay tax.
Suppose the company wants to diversify into
the manufacture of rose-colored spectacles.
The beta of unleveraged optical
manufacturers is 2.
Estimate the required return on Okefenokee's
new venture.
(If you cannot find your answer in the choices
below, please choose the choice that is
closest to your answer)
Group of answer choices
10%
10.9%
9.4%
8.9%
8.5%
The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is
$7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%.
The Treasury bill rate is 3%. 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?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
b. Estimate the company cost of capital.
Note: 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?
Note: 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…
The total market value of the
common stock of Company A is $12
million, and the total value of its debt
is $8 million. The treasurer estimates
that the beta of the stock is currently
1.20 and that the market risk
premium is 7.5%. The Treasury bill
rate is 2.5%. Assume for simplicity
that Company A debt is risk-free. The
Company's tax rate is 28% . a) What
is the pre-tax cost of capital for
Company A?
b) What is
the WACC for Company A ?
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE
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Ch. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 10PSCh. 9 - Measuring risk The following table shows estimates...Ch. 9 - Prob. 12PSCh. 9 - Asset betas Which of these projects is likely to...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 23PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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