Calculate cost of equity using dcf-capm

Reference no: EM1332887

Medical Associates is a large for-profit group practice. Its dividends are expected to grow at a constant rate of 7% per year into the foreseeable future. The firm's last dividend (D0) was $2, and its current stock price is $23. The firm's beta coefficient is 1.6; the rate of return on 20-year T-bonds currently is 9%; the expected rate of return is 13%. The firm's target capital structure calls for 50% debt financing, the interest rate required on the business's new debt is 10%, and its tax rate is 40%.

1. Calculate Medical Associates' cost of equity estimate using the DCF method.

2. Calculate the cost of equity estimate using CAPM.

3. On the basis of your answers to #1 & #2, what is your final estimate for the firm's cost of equity?

4. Calculate the firm's estimate for corporate cost of capital.

5. Describe how is project risk is incorporated into a capital budgeting analysis.

Reference no: EM1332887

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