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 1.2 and that the expected risk premium on the market is 10%. The Treasury bill rate is 4% and investors believe that Okefenokee's debt is essentially free of default risk.
a. What is the required rate of return on Okefenokee stock?
b. Estimate the WACC assuming a tax rate of 40%
c. Estimate the discount rate for an expansion of the company's present business.
d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of potical manufacturers with no debt outstanding is 1.4. 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 an additional debt)