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The total market value of Okefenokee Real Estate Company's equity is $3 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 1.1 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? Required rate of return 10.5 % 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.) Weighted-average beta .66 c. Estimate the weighted-average cost of capital assuming a tax rate of 30%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) WACC % d. Estimate the discount rate for an expansion of the company’s present business. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Discount rate % e. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.3. 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.) Required rate of return % rev: 12_07_2012
All else equal, which of the following is most likely to increase a company's retained earnings breakpoint? A decrease in the fraction of equity used in the company's target capital structure. An increase in the company's dividend payout ratio.
Emily is in the 25% bracket and has $15,000 available for investment during her current tax year. Assume that she remains in the same tax bracket over the next 7 years and determine the accumulated amount of her investment if she puts the $15,000 int..
Can you describe a situation when we use pro-forma incremental earnings and pro-forma free cash flow? I still can’t understand how they work in a real world.
BOND VALUATION Callaghan Motors' bonds have 13 years remaining to maturity. Interest is paid semi annually, they have a $1,000 par value, the coupon interest rate is 5%, and the yield to maturity is 6%. What is the bond's current market price?
The idea that investors in a common stock may expect a lower total return if they purchase a stock with limited price volatility rather than one with high price volatility suggests that: What is the approximate variance of returns if over the past 3 ..
General Cereal common stock dividends have been growing at an annual rate of 7 percent per year over the past 10 years. Current dividends are$1.70 per share. What is the current value of a share of this stock to an investor who requires a 12 percent ..
NPV Calculate the net present value (NPV) for the following 15-year projects. Comment on the acceptability of each. Assume that the firm has a cost of capital of 9%.
A machine at a bottling plant that has a first cost of $150,000, operating and maintenance costs of $17,500 per year, and an estimated net salvage value of $25,000 at the end of thirty years. Assume an interest rate of 8%. What is the present equiv..
1) You decide to buy 1,000 shares of ABC Company at $50 per share with an initial margin of 50%, the call money rate is 6%. The stock has no dividend, and one year later ABC stock is at $57 per share. What’s the margin level one year later? What is y..
Bridgewell Industries is evaluating the option of purchasing a fork-lift truck costing $60,000. If purchased, the truck will replace 4 workers, each with an average annual salary of $15,000. Bridgewell uses straight-line depreciation and depreciates ..
You purchased a machine for $1.06 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 35%. If you sell the machine today (after three years of depreciation) for $779,000, what is y..
What interest rate would make it worthwhile to incur a compensating balance of $20,000 in order to get a 1 percent lower interest rate on a 1 year, pure discount loan of $275,000?
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