IvanRivera6-Corporate.Finance.Unit 6 Assignments

IvanRivera6-Corporate.Finance.Unit 6 Assignments -...

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IvanRivera6 Corporate Finance MT480 Prof. Weaver CHAPTER 9 PQ: 1,7,8a, 8c and 11 1. 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 percent. The Treasury bill rate is 4 percent. 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? r equity = r f + β × (r m – r f ) = 0.04 + (1.5 × 0.06) = 0.13 = 13% b. Estimate the company cost of capital. r assets = 0.094 = 9.4% c. What is the discount rate for an expansion of the company’s present business? 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 9.4%. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. r equity = r f + β × (r m – r f ) = 0.04 + (1.2 × 0.06) = 0.112 = 11.2% r assets = 0.0832 = 8.32% The beta of unleveraged optical manufacturers is 1.2. Estimate the required
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return on Okefenokee’s new venture. 7.
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This note was uploaded on 07/06/2011 for the course MM 305 taught by Professor Fulton during the Fall '09 term at Kaplan University.

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IvanRivera6-Corporate.Finance.Unit 6 Assignments -...

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