Golden State Home Health, Inc., is a large, California-based forprofit home health agency. Its dividends are expected to grow at a constant rate of 5 percent per year into the foreseeable future.

The firm’s last dividend (D0) was $1, and its current stock price is

$10. The firm’s beta coefficient is 1.2; the rate of return on 20-year T-bonds currently is 4 percent; and the expected rate of return on the market, as reported by a large financial services firm, is 8 percent. Golden State’s target capital structure calls for 60 percent debt financing, the interest rate required on its new debt is 9 percent, and the firm’s tax rate is 30 percent.

a. What is the firm’s cost-of-equity estimate according to the DCF method?

b. What is the cost-of-equity estimate according to the CAPM?

c. On the basis of your answers to parts a and

b, what would be your final estimate for the firm’s cost of equity?

d. What is your estimate for the firm’s CCC?