Understanding healthcare financial management

estimate for the firm’s cost of equity? d. What is your estimate for the firm’s corporate cost of capital? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 9 — Cost of Capital PROBLEM 7 An analyst has collected the following information regarding Christopher Healthcare: – The company’s capital structure is 70 percent equity, 30 percent debt. – The yield to maturity on the company’s bonds is 9 percent. – The company’s year-end dividend is forecasted to be $0.80 a share. – The company expects that its dividend will grow at a constant rate of 9 percent a year. – The company’s stock price is $25. – The company’s tax rate is 40 percent.

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– The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company’s CCC. ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 9 — Cost of Capital PROBLEM 8 Grateway Inc. has a corporate cost of capital of 11.5 percent. Its target capital structure is 55 percent equity and 45 percent debt. The before-tax cost of debt is 9 percent, and the company’s tax rate is 30 percent. If the expected dividend next period (D1) and current stock price are $5 and $45, respectively, what is the company’s growth rate? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 9 — Cost of Capital PROBLEM 9 USC Health’s balance sheets show a total of $30 million long-term debt with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11 percent, and the debt has a total current market value of $25 million. The balance sheets also show that that the company has 10 million shares of stock; the total of common stock and retained earnings is $30 million. The current stock price is $7.5 per share. The return required by stockholders, R(Re), is 12 percent. The company has a target capital structure of 40 percent debt and 60 percent equity.

The tax rate rate is 40 percent. What corporate cost of capital should you use to evaluate potential projects? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 9 — Cost of Capital PROBLEM 10 A stock analyst has obtained the following information about J-Mart, a large pharmacy chain: – The company has noncallable bonds with 20 years maturity remaining and a maturity value of $1,000. The bonds have a 12 percent annual coupon and currently sell at a price of $1,273.86. – Over the past four years, the returns on the market and on J-Mart were as follows: Year Market J-Mart 1 12.0% 14.5% 2 17.2% 22.2% 3 -3.8% -7.5% 4 20.0% 24.0% – The risk-free rate is 6.35 percent, and the expected return on the market is 11.35 percent. The company’s tax rate is 35 percent. The company anticipates that its proposed investment projects will be financed with 70 percent debt and 30 percent equity. What is the company’s estimated corporate cost of capital (CCC)? ANSWER Understanding healthcare financial management