Purchase Solution

# Cost of capital, discount rate and true NPV

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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 Okefenokee debt is risk-free and the company does not pay tax.
Total Market Value Total Debt Value Beta Risk Premium T-Bill Rate Risk Free Rate Tax Rate
Okefenokee Real Estate Company 6 million 4 million 1.5 6% 4% 0 0

a. What is the required return on Okefenokee stock?
b. Estimate the company cost of capital.
c. What is the discount rate for an expansion of the companyââ?¬â?¢s present business?
d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 1.2. Estimate the required return on Okefenokeeââ?¬â?¢s new venture.
See attached and provide assistance to problems 9-11 and 10-9

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Cost of capital, discount rate and true NPV

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