The total market value of Okefenokee Real Estate Company\'s equity is $8 million
ID: 2636166 • Letter: T
Question
The total market value of Okefenokee Real Estate Company's equity is $8 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 0.6 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%.
a. What is the required rate of return on Okefenokee stock?
b. What is the beta of the company
The total market value of Okefenokee Real Estate Company's equity is $8 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 0.6 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%.
a. What is the required rate of return on Okefenokee stock?
b. What is the beta of the company
Explanation / Answer
a>Required Rate of Return=Riskfree Rate+Beta*Risk Premium=5+0.6*(10-5) 8 b>Beta=(Value of Debt*Cost of Debt+Value of Equity*Cost Equity)/(Value of Debt+Value of Equit=(8*0.6)/(8+2) 0.48 c>Lets consider the debt to be risk free and has a rate of 5%, So cost after tax=(1-0.30)*5 3.5 WACC=(8*8+2*3.5)/(8+2) 7.1 d>Discount rate=WACC=7.1% e)At the Beta of 0.8 , Cost of Equity=5+0.8*(10-5) 9 WACC=(8*9+2*3.5)/(8+2) 7.9
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