Q: Southeastern Homecare has two operating divisions: the Healthcare Services Division and the Information Systems Division.

a. Estimate the divisional cost of capital for each of Southeasterns divisions assuming that both divisions have the same optimal (target) capital structure. (Hint: Use the CAPM to produce a cost of equity for each division and assume the same corporate tax rate and debt cost for each division.)

b. Southeasterns divisions are each considering two investment opportunities for next year. In which of the projects should Southeastern invest?

c. The divisional presidents have expressed concern that a single cost of capital will be applied across the company, regardless of any divisional risk differences. What would be the short-term and longterm consequences of Southeastern using a single cost of capital for both divisions?

d. Is the divisional cost of capital applicable for all projects within that division? Explain.

e. Suppose that one division has a greater capacity for debt financing than the other (perhaps due to higher asset value and profitability.) How could different target capital structures be incorporated into the divisional costs of capital?

Q: The founders of Southeastern are concerned about the threat posed by home health care businesses started by not-for-profit hospitals. Using your answer to Question 4a and the data in Table 18.3, estimate the cost of capital for the homecare division of an average not-for-profit hospital. How much confidence do you have in the cost of capital estimate? Why?

Q: One of Southeasterns directors has expressed concern over the difference between the companys target capital structure and the current structure as reported on the balance sheet.

a. What are the book values of Southeasterns long-term debt and equity? What are the current market values of Southeasterns long-term debt and equity?

b. What are Southeasterns target weights, book value weights, and current market value weights of long-term debt and equity (that is, long-term debt / total capital and common stock / total capital)?

c. Which set of weights should be used in the corporate cost of capital estimate? Why?

SOUTHEASTERN CARE COST OF CAPITAL SOUTHEASTERN HoMECARE wAs ounded in 199 in Miami Florida, as a taxable partnership by Maria Gonzalez, MD: Rat Garcia, RN. and Ron Sparks, LPT. Its purpose was mon home" alternative to hospitals and to an "at- healthcare services provided ambulatory care facilities for basic ractical nurses, and by physicians, registered nurses, licensed physical therapists. (For more information on home health services, see the website of the National Association for Home Care & Hospice at www.nahc.org.) The partnership enjoyed enormous success from the very first day of operations. Even its founders were surprised at how easy it was to establish and run the business. The founding coincided with the search by third-party payers for alternative, and potentially less costly, settings. On the basis of its success in metropolitan Miami, the partner ship expanded services into Fort Lauderdale and West Palm Beach and then moved into other metropolitan areas in Florida and across the US Southeast. The partners also expanded their services at each location to include occupational, speech, and rehabilitation therapies. The founders had sufficient personal resources to start the company, they had enough confidence in their business plan to commit most their funds to the new venture. However, after only six own rears, the external capital requirements brought on by rapid growth austed their personal funds, and they were forced to borrow heavily. Soon, still needed external capital to finance growth, the although they was sold borrow at rates they n 2002, they incorporated the partnership, and in 2005