Atlantic Healthcare is an investor-owned hospital chain that owns and operate nine hospitals in Maryland, Virginia, and the District of Columbia. Marcia Long, a recent graduate of a prominent healthcare administration program, has just been hired by Washington Medical Center, Atlantics largest hospital. Like all new management personnel, Marcia must undergo three months of intensive indoctrination at the system level before joining the hospital. Atlantics chief financial officer, Hugo Welsh, was quite impressed with the quality of Marcias analysis of the firms bonds (see HW Chapter 5). Furthermore, the other members of the committee stated that they learned a great deal about debt financing from Marcias presentation and that they would like to see a similar presentation on equity financing. Because Marcia would be leaving corporate headquarters to start her hospital assignment in less than four weeks, Hugo immediately assigned her the task of analyzing the firms equity situation and preparing another presentation for the executive committee. Marcia began by reexamining the firms annual report to get some basic data. Then, she searched the Wall Street Journal, Value Line, and other potential sources of financial data to obtain some market data as well as analysts forecasts for the firm. Exhibit A contains the information that Marcia developed. Hugo did not want Marcia to go off on a tangent, so he provided her with a list of questions to answer. Put yourself in Marcias shoes and see how you would fare if assigned this task and need to answer the following questions:

c. Graph the SML using the data presented in Exhibit A.

d. According to the SML, what is the required rate of return on Atlantics stock?

Part 4 For now, disregard the dividend growth rates given in Exhibit A. Assume that analysts estimated that Atlantic will have a long-term (constant) dividend growth rate of 5%. Furthermore, Exhibit A gives a 2015 dividend (D0) of $0.48 and an end-of-year (December 31, 2015) stock price (P0) of $8.00.

a. What is the expected rate or return on Atlantics stock if it is purchased on January 1, 2016?

EXHIBIT A

Historical Data:

Year	Earnings per Share $	Dividends per Share $
2010	1.14	0.21
2011	1.32	0.32
2012	1.54	0.35
2013	1.56	0.36
2014	1.80	0.39
2015	2.00	0.48

Assumed Current (January 1, 2016) Data:

Current stock price	$8.00
Estimated dividend growth rates:
Nest 5 years	10%
Long-term steady rate	4%
Market Data:
Yield on long-term Treasury bonds	5%
Merrill Lynch estimated of market returns	11%
Value Line beta coefficient	1.2