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The total market value of the common stock of the Okefenokee Real Estate Company is $9.5 million, and Enter question
the total value of its debt is $6.1 million. The treasurer estimates that the beta of the stock is currently 1.6
and that the expected risk premium on the market is 9%. The Treasury bill rate is 5%. 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 Continue to post
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 14 questions remaining
percent rounded to 2 decimal places.)
c What is the discount rate for an expansion of the company's present business? (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 Snap a photo from your
unleveraged optical manufacturers is 1.20. Estimate the required return on Okefenokee's new venture. (Do phone to post a question
not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. We'll send you a one-time downloa
link
A. Required Return:_____%
B. Cost of Capital:____%
C. Discount Rate:_____%
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D. Required Return:______% By providing your phone number, you agree to receive a one-
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Expert Answer
As per CAPM
expected return = risk-free rate + beta * (Market risk premium) Principles of Principles of Principles o
Corporate... Corporate...
Expected return% = 5 + 1.6 * (9) 9th Edition 10th Edition 8th Edition
D/E = 6.1/9.5=0.6421
D/A = D/(E+D)
D/A = 0.6421/(1+0.6421)
=0.391
W(E)=0.609
W(D)=0.391
=5
WACC =13.77%
As per CAPM
D/A = D/(E+D)
D/A = 0.6421/(1+0.6421)
=0.391
W(E)=0.609
W(D)=0.391
=5
WACC=5*0.391+28.67*0.609
WACC =19.42%
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value of its debt is $8.5 million. The treasurer estimates that the beta of the stock is currently 1.8 and that the
expected risk premium on the market is 9%. The Treasury bill rate is 4%. Assume for simplicity that Okefenokee debt is
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risk-free and the company does not pay...
A: See answer
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