PROBLEM $7$

Assume that HCA is evaluating the feasibility of building a new hospital in an area not currently

served by the company. The company's analysts estimate a market beta for the hospital project of

$1\mathrm{.}1,$ which is somewhat higher than the $0\mathrm{.}8$ market beta of the company's average project.

Financial forecasts for the new hospital indicate an expected rate of return on the equity portion

of the investment of $20$ percent. If the risk$-$free rate, RF$,$ is $7$ percent and the required rate of

return on the market, $R(Rm),$ is $12$ percent, is the new hospital in the best interest of HCA's

shareholders? Explain your answer.

ANSWER