Southern Healthcare and BestWell are for-profit HMOs that operate in Florida and Georgia. Currently,
both are identical in every respect except that Southern is unleveraged while BestWell has $10 million
of 5 percent bonds. Both HMOs report an EBIT of $2 million and pay corporate tax at a rate of 30
percent. The cost of equity to Southern is 10 percent. Assume that all of the MM assumptions hold.
a. What total value would MM estimate for each HMO?
b. What is the value of the equity of each HMO?
c. What is the required rate of return on equity for each HMO?
d. What is the corporate cost of capital for each HMO?