The total market value of the common stock of the Okefenokee Real Estate Company

Question

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 Okenfenokee debt is risk-free and the company does not pay tax.

A. What is the requirred return on Okefenokee stock?
B. Estimate the company cost of capital.
C. What is the discount rate for an expasion of the company's present business?
D. Suppose the company wants to diversify into the manufacturers is 1.2. Estimate the required return on Okenfenokee's new venture.

Explanation / Answer

A. Required return is 4% + 1.5 * 6% = 13% B. Debt is 4% so .4* .04 +.6*.13= 9.4% C. 1/1.094= 0.9141 D. Please clarify question. What does "diversify into the manufacturers is 1.2" mean?

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.