Help Save&Exlt; Sumt Check my work Problem 13-11 Project Discount Rate (LO2) The

Question

Help Save&Exlt; Sumt Check my work Problem 13-11 Project Discount Rate (LO2) The total market value of the equity of Okefenokee Condos is $8 million, and the total value of estimates that the beta of the stock currently is 06 and that the 4%, and investors believe that Okefenokee's debt is essentially free of default nsk its debt is $2 millon. The treasurer 20 expected risk premium on the market is 10%. The Treasury bil rate is a. What is the required rate of return on Okefenokee stock?Do not round intermediate calculations. Enter your answer as a whole b. Estimate the WACC assuming a tax rate of 40% (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places c. Estimate the discount rate for an expansion of the companys present business. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) d. Suppose the compeny wents to diversity into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding i Enter your answer as a whole percent) s 8 What is the requred rate of eetun on Okefenokee's new venture? (Do not round Intermediate caiculations O/ 2 3 4 5 8

Explanation / Answer

Required return on Equity = Risk free Rate + Beta * (Market Rate - Risk Free Rate)

Required return on Equity = 4% + 0.6 * 10%

Required return on Equity = 10%

WACC = 2/(2 + 8) * 4% * (1 - 40%) + 8/ (2 + 8) * 10%

WACC = 0.48% + 8%

WACC = 8.48%

Part C

The cost of capital depends on the risk of the project being evaluated. If the risk of the project is similar to the risk of the other assets of the company, then the appropriate rate of return is the company cost of capital. Here, the appropriate discount rate is 8.48%

Part D

Required return on Equity = Risk free Rate + Beta * (Market Rate - Risk Free Rate)

Required return on Equity = 4% + 0.8 * 10%

Required return on Equity = 12%

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