Medical Associates is a large for-profit group practice. Its dividends are expected to grow at a constant rate of 7 percent per year into the foreseeable future.

• The firms last dividend (DO) was $2 and its current stock price is $23.
• The firms beta coefficient is 1.6; the rate of return on a 20-year T-bonds is 9 percent; and the expected rate of return on the market, as reported by a large financial services firm, is 13 percent.
• The firms target capital structure calls for 50 percent debt financing, the interest rate required on the businesss new debt is 10 percent, and its tax rate if 40 percent.

1. What is the Medical Associates cost of equity estimate according to the DCF method
2. What is the cost of equity estimate according to the CAPM?
3. On the basis of your answers to Parts A. and B., what would be your final estimate for the firms cost of equity?