Medical Associates

Medical Associates is a large for-profit group practice. Its dividends are evaluator to grow at a constant enact of 7% per year into the foreseeable future. The dissolutes last dividend (D0) was $2, and its up-to-the-minute melody price is $23. The firms beta coefficient is 1.6; the broadcast of make it on 20 year T-bonds currently is 9%; the expected say of return is 13%. The firms tar ache peachy structure c whollys for 50% debt financing, the interest ordain required on the businesss unused debt is 10% and its tax measure of 40%. 1- Calculate Medical Associates face of equity musical theme employ the DCF method. The represent of equity is the score of return that investors require on the firms multiplicative inverse stock. Earnings can be paid in the crystalise of dividends or retained for reinvestment in the business. The discounted exchange flow (DCF) nonplus E(Re)= D0 x [1 + E(g)] + E(g) = E(D1)/Po + E(g) D0 is $2 x 1+7%= $2 x 1.07 = $2.14 Current Stock price is $23 (Po) R(Re)= E(D1)/P0 + E(g) =2.14/23 + 7%= 16.30% 2- Calculate the address of equity estimate using CAPM R(Re)= RF + [R(Rm)- RF] x b = RF + (RPm x b) = 9% + (13% - 9% ) x 1.6 = 9% + (4% x 1.6) = 9% + 6.4%= 15.40% 3- On the root of your comes to #1 & #2, what is the final estimate of the firms cost of equity.

Cost of equity is the rate of return that investors require on the firms common stock. The answer is 15.40% the CAPM is correct because it top hat describes the risk/return choices of stock investors. 4-The corporate cost of neat represents the cost of each new dollar of capital raised, sooner than the average cost of all the dollars raised in the past. 300 = [Wd x R(Rd) x (! 1 T)] + [We x R(Re)] Target capital of 50% with before tax rate of 10% the tax rate is 40%, T and the cost of equity is 15.40 %, = [0.50 x 10% x (1 0.40)] + [0.50 x 15.40%] = 15.70% 5- eviscerate the four (4) steps of capital budgeting analysis. 1- Estimate the projects expected cash flows, which consist of the following. a. Capital outlay or cost...If you want to get a full essay, pitch it on our website: OrderEssay.net

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