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1. A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company's common stock is .5. What is the company cost of capital? What is the after-tax WACC, assuming that the company pays tax at a 35% rate?
2. 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.
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 company's present business?
d. Suppose the company wants to diversify into the manufacture of rose-colored specta-cles. The beta of unleveraged optical manufacturers is 1.2. Estimate the required return on Okefenokee's new venture.
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Your new beta should be calculated automatically. Compare the levered versus the unlevered beta. Please notice that if your firm holds no debt with a tax-deductibility feature, then levered and unlevered beta should be the same.
Management estimates that the beta of the debt is 0.3 and the beta of the total assets is 0.5. What is the beta of XYZ Company"s equity?
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