9/1/2014

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 7 -- Equity Financing

Mini-Case

Sam Strother and Shawna Tibbs are senior vice presidents of Mutual of Seattle Group Health Cooperative and codirectors of the organization's pension fund management division. The unions that represent the GHC hospital staff have requested an investment seminar so that they better understand the decisions being made on behalf of their members. Strother and Tibbs, who will make the actual presentation, have asked you to help them.

To illustrate the common stock valuation process, Strother and Tibbs have asked you to analyze the Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions.

a. Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7 percent, and that the market risk premium is 5 percent. What is the required rate of return on the firms stock?

b. Assume that Temp Force is a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00, and whose dividend is expected to grow indefinitely at a 6 percent rate.

- What is the firms expected dividend stream over the next three years?

- What is the firms expected current stock price?

- What is the stock's expected value one year from now?

- What are the expected dividend yield, capital gains yield, and total return during the first year?

c. What would the expected current stock price be if its dividends were expected to have zero growth?

d. Now assume that Temp Force is expected to experience supernormal growth of 30 percent for the next three years, then to return to its long-run constant growth rate of 6 percent.

- What is the stock's value today and one year from today under these conditions?

- What is its expected dividend yield, capital gains yield, and total return in Year 1?