Assume that Dominion Healthcare facility is a large group practice. Its dividends are expected to grow at a constant rate of 7 percent per year into the foreseeable future.. The firm’s last dividend (D0) was $2.00, 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 percent; and the expected rate of return on the market, as reported by a large financial services firm is 13 percent. The firm’s target capital structure calls for 50 percent debt financing , the interest rate required on the business’s new debt is 10 percent, and its tax rate is 40 percent. [please show work]
a. What is the firm’s cost-of-equity estimate according to the DCF method?
b. What is the firm’s cost-of-equity estimate according to the CAPM method?
c. On the basis of your answers for Parts a and b, what would be your final estimate for the firm’s cost of equity?