Question
Golden state homevhealth, inc, is a large, california based for profit home health agency. its dividends are expected to grow at a constant rate of
Golden state homevhealth, inc, is a large, california based for profit home health agency. its dividends are expected to grow at a constant rate of 5 percent per year into the foreseeable future. the firms last dividend (Do) was $1, and its current stock price is $10. the firms beta coefficient is 1.2, the rate of return on 20 year T bond currently is 8 percent , and the expected rate of return on the market as reported by a large financial service firm, is 14 percent. Golden State target capital structure calls for 60 percent debt financing , the interest rate required on its new debt is 9 percent, and the firms tax rate is 30 percent.
a)What is the firms 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 answer to part a and b what would be your estimate for the firms cost of equity?
d)What is your estimate for the firms corporate cost of capital?
Step by Step Solution
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Step: 1
a The cost of equity estimate according to the Dividend Discount Model DCF can be calculated using t...Get Instant Access to Expert-Tailored Solutions
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Step: 2
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