The total market value of Muskoka Real Estate Company is $6 million and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 7%. The Treasury bill rate is 4%.
a. What is the required rate of return on Muskoka stock? (Round your answer to 2 decimal places.)
Rate of return %
b. What is the beta of the company's existing portfolio of assets? The debt is perceived to be virtually risk-free. (Round your answer to 2 decimal places.)
Beta
c. Estimate the weighted-average cost of capital assuming a tax rate of 40%. (Round your answer to 2 decimal places.)
Cost of capital %
d. Estimate the discount rate for an expansion of the company's present business. (Round your answer to 2 decimal places.)
Discount rate %
e. Suppose the company wants to diversify into the manufacture of rose-coloured glasses. The beta of optical manufacturers with no debt outstanding is 1.2. What is the required rate of return on Muskoka's new venture?