PROBLEM 1

St. David's Hospital in Austin, Texas has a target capital structure of 35 percent debt and 65 percent equity. Its cost of equity (fund capital) estimate is 13.5 percent and its cost of tax-exempt debt estimate is 7 percent. What is the hospital's corporate cost of capital?

PROBLEM 2

The University of Maryland Nursing Home, a single not-for-profit facility, is estimating its corporate cost of capital. Its tax-exempt debt currently requires an interest rate of 6.2 percent, and its target capital structure calls for 60 percent debt financing and 40 percent equity (fund capital) financing. The estimated costs of equity for selected investor-owned healthcare companies are given below:

Glaxo Smith Kline 15.0%

Beverly and Golden Living Centers 16.4%

HCA 17.4%

Humana 18.8%

a. What is the best estimate for U of M's cost of equity?

b. What is the firm's corporate cost of capital?