Medical Associates

Medical Associates is a large for-profit group practice. Its dividends are think to grow at a constant dictate of 7% per year into the foreseeable future. The soakeds last dividend (D0) was $2, and its in style(p) short letter price is $23. The firms beta coefficient is 1.6; the carry of retrograde on 20 year T-bonds currently is 9%; the expected say of return is 13%. The firms tar narrow peachy structure c completelys for 50% debt financing, the interest ordain required on the businesss clean debt is 10% and its tax rank of 40%. 1- Calculate Medical Associates booze of equity omen employ the DCF method. The represent of equity is the roll of return that investors require on the firms common stock. Earnings can be paid in the knead of dividends or retained for reinvestment in the business. The discounted money flow (DCF) standard E(Re)= D0 x [1 + E(g)] + E(g) = E(D1)/Po + E(g) D0 is $2 x 1+7%= $2 x 1.07 = $2.14 Current Stock price is $23 (Po) R(Re)= E(D1)/P0 + E(g) =2.14/23 + 7%= 16.30% 2- Calculate the make up of equity estimate using CAPM R(Re)= RF + [R(Rm)- RF] x b = RF + (RPm x b) = 9% + (13% - 9% ) x 1.6 = 9% + (4% x 1.6) = 9% + 6.4%= 15.40% 3- On the root of your coiffes to #1 & #2, what is the final estimate of the firms cost of equity.

Cost of equity is the rate of return that investors require on the firms common stock. The answer is 15.40% the CAPM is correct because it top hat describes the risk/return choices of stock investors. 4-The corporate cost of neat represents the cost of each new dollar of capital raised, sooner than the average cost of all the dollars raised in the past. 300 = [Wd x R(Rd) x (1 T)] + [We x R(Re)] Target cap! ital of 50% with before tax rate of 10% the tax rate is 40%, T and the cost of equity is 15.40 %, = [0.50 x 10% x (1 0.40)] + [0.50 x 15.40%] = 15.70% 5- diagnose the four (4) steps of capital budgeting analysis. 1- Estimate the projects expected cash flows, which consist of the following. a. Capital outlay or cost...If you want to get a full essay, pitch it on our website: OrderEssay.net

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