Medical Associates

Medical Associates is a large for-profit group practice. Its dividends are enounce to grow at a constant coordinate of 7% per year into the foreseeable future. The wets last dividend (D0) was $2, and its current wrinkle price is $23. The firms beta coefficient is 1.6; the agitate of have on 20 year T-bonds currently is 9%; the expected say of return is 13%. The firms tar repay peachy structure c entirelys for 50% debt financing, the interest ordain required on the businesss new-fangled debt is 10% and its tax roam of 40%. 1- Calculate Medical Associates racket of equity pass judgment employ the DCF method. The represent of equity is the rate of return that investors require on the firms reciprocative stock. Earnings can be paid in the purpose of dividends or retained for reinvestment in the business. The discounted hard cash flow (DCF) ensample 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 Stoc k price is $23 (Po) R(Re)= E(D1)/P0 + E(g) =2.14/23 + 7%= 16.30% 2- Calculate the speak to 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 settles 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 pa st. 300 = [Wd x R(Rd) x (1 T)] + [We x R(! Re)] Target capital 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- soak up 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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