question archive The total market value of the common stock of the Texas Technology Company is $7 million, and the total value of its debt is $3 million
The total market value of the common stock of the Texas Technology Company is $7 million, and the total value of its debt is $3 million
Subject:BusinessPrice: Bought3
The total market value of the common stock of the Texas Technology Company is $7 million, and the total value of its debt is $3 million. The treasurer estimates that the beta of the stock is currently 1.3 and that the expected risk premium on the market is 8%. The Treasury bill rate is 6%. Assume for simplicity that Texas Technology Company debt is risk-free and the company does not pay tax.
(Please round to Two Decimal Places)
a. What is the required return on the company's stock? (Sample Answer: 14.50%)
b. Estimate the company cost of capital.(Sample Answer: 14.50%)
c. Suppose the company wants to diversify into a noise reduction chip business. The beta of unleveraged noise reduction chip manufacturers is 2.0. What is the required return on the company's new venture.(Sample Answer: 14.50%)
