# Cost of capital, discount rate and true NPV

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

https://brainmass.com/economics/risk-analysis/cost-of-capital-discount-rate-and-true-npv-444294

#### Solution Preview

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 ...

#### Solution Summary

Cost of capital, discount rate and true NPV