Question
. Happy Home Health, Inc. is a large, California-based for-profit home health agency. Its dividends are expected to grow at a constant rate of 5
. Happy Home Health, 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 firm's last dividend (D0) was $1.50, and its current stock price is $12. The firm's beta coefficient is 1.2; the rate of return on 20-year T-bonds currently is 7 percent; and the expected rate of return on the market, as reported by a large financial services firm, is 12 percent. HHHIs target capital structure calls for 55 percent debt financing, the interest rate required on its new debt is 8 percent, and the firm's tax rate is 29 percent | ||
a. What is the firm's cost of equity estimate according to the DCF method? |
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b. What is the cost of equity estimate according to the CAPM? |
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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 corporate cost of capital? |
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