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The total market value of Okefenokee Real Estate Company’s equity is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock currently is 1.0 and that the expected risk premium on the market is 12%. The Treasury bill rate is 4%, and investors believe that Okefenokee's debt is essentialy free of default risk.
a. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.)
Required rate of return %
b. Estimate the WACC assuming a tax rate of 30%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
WACC %
c. Estimate 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.)
Discount rate %
d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.5. What is the required rate of return on Okefenokee’s new venture? (You should assume that the risky project will not enable the firm to issue any additional debt.) (Do not round intermediate calculations. Enter your answer as a whole percent.)
You plan to invest at a yearly 7.88% interest compounded yearly for 9 years. If you want the investment will be worth $10,269 after 9 years, then you must put $_____ in the investment now. You plan to invest at yearly 13% interest compounded monthly.
What is the maximum sustainable growth rate for this company?
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Suppose you held a diversified portfolio consisting of a $7, 500 investment in each of 20 different common stocks. What would your portfolio's new beta be?
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