Question

Problem 13-11 Project Discount Rate (LO2) The total market value of the equity of Okefenokee Condos is $12 million, and the total value of its debt is $8 million. The treasurer estimates that the beta of the stock currently is 1.5 and that the expected risk premium on the market is 6%. The Treasury bill rate is 3%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Estimate the WACC assuming a tax rate of 21% (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. Estimate the discount rate for an expansion of the company's present business. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 2.0. 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 any additional debt.) (Do not round intermediate calculations. Enter your answer as a whole percent.) Answer is complete but not entirely correct. 12 % b. 7.92 x Required rate of return WACC Discount rate Required rate of return d.

Answer 1

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- 2x Σ AutoSum : A Fill 2 Sort & Clear Filter Editing Find & Select DY DZ EA - projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 AA = = = pt Wrap Text Percentage Ea Copy Paste B I U Format Painter - D A Merge & Center $ - % Conditional Format 8.9 Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells DU131 for DM DNDODPDQ DR DS DI DUDV DW DX 114 115 ke = Rf + beta(Rm-Rf) RISK PREMIUM = Rm-Rf = 6% 116 REQUIRED RETURN ON EQUITY= ke = 3% +1.5*(6%) = 12.00% 117 118 D = We = [12/20] 119 Wd= [8/20] 120 121 122 WACC = We*ke+Wd*kd*(1-t) WACC = (12/20)*(12%) +(8/20)*(3%)(1-0.21) = 8.15% 124 125 126 IF THE RISK OF THE PROJECT IS SIMILAR TO THE EXISTING PROJECTS OF THE COMPANY 127 APPROPRIATE DISCOUNT RATE = WACC = 8.15% 128 129 REQUIRED RETURN ON EQUITY= ke = 3% +2*(6%) = 15.00% 00 ♡ 123 130 131 132 HON Red BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE NPV_RELEVANT ferences SENSITIVITY Sheet1 I BOI 130% 0 + ELEB * * OENG 05-11-2019