the total market value of the equity of okefenokee condos is $4 million, and the total value of its debt is $1 million. the treasurer estimates that the beta of the stock currently is 1.0 and that the expected risk premium on the market is 11%. the treasury bill rate is 3%, and investors believe that okefenokee's debt is essentially free of default risk.

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Kentiarrabeason9582idn Kentiarrabeason9582idn

07-09-2022
Business

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the total market value of the equity of okefenokee condos is $4 million, and the total value of its debt is $1 million. the treasurer estimates that the beta of the stock currently is 1.0 and that the expected risk premium on the market is 11%. the treasury bill rate is 3%, and investors believe that okefenokee's debt is essentially free of default risk.

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Qwpinkidn Qwpinkidn · Answer 1 · 2022-09-16T03:20:05-04:00

The firm's WACC is 11.92%.

Based on market values, the weights of debts and equities are:

debts = 1 / (4 + 1) = 20%

equity = 4 / (4 + 1) = 80%.

The cost of debt is the same as the interest rate on treasury bills, which is 3%. We can use the capital asset pricing model (CAPM) to compute the cost of equity. According to CAPM:

required return on the stock = risk free rate + beta * market risk premium = 3% + 1.0 x 11% = 14%.

WACC = 40%*3%*(1 - 40%) + 80%*14% = 11.92%.

A measurement of a company's overall cost of capital is the weighted average cost of capital. It is determined by averaging the after-tax cost of equity and debt, weighted by the market value of the firm's equity and debt, respectively.

Learn more about the weighted average cost of capital https://brainly.com/question/8287701

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