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A relatively small medical group practice is trying to estimate its corporate cost of capital. The practice is 100 percent equity financed. The rate of
A relatively small medical group practice is trying to estimate its corporate cost of capital. | |||||||||||||||||||||||||||||||||||||||||||||
The practice is 100 percent equity financed. The rate of return on 20-year Treasury bonds is | |||||||||||||||||||||||||||||||||||||||||||||
currently 6 percent, and the expected rate of return on the market is 12 percent. A large | |||||||||||||||||||||||||||||||||||||||||||||
practice management firm has a beta coefficient of 0.9. Market research indicates that the | |||||||||||||||||||||||||||||||||||||||||||||
cost of equity for very small firms is approximately 4 percentage points higher than the cost | |||||||||||||||||||||||||||||||||||||||||||||
of equity for large firms. Moreover, the investors in the small group practice face liquidity | |||||||||||||||||||||||||||||||||||||||||||||
risk and thus determine that a liquidity premium of 2 percentage points is appropriate. | |||||||||||||||||||||||||||||||||||||||||||||
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