Golden State Home Health, Inc., is a large, California-based for-profit home health agency. Its dividends are expected to grow at a constant rate of 5% per year into the forseeable future. The firm's last divident (Do) was $1, and its current stock price is $10. The firm's beta coefficient is 1.2; the rate of return on on 20-year T-bonds currently is 8%; and the expected rate of return on the market, as reported by a large financial services firm, is 14%. Golden State's target capital structure calls fpr 60% debt financing, the interest rate required on its new debt is 9%, and the firm's tax rate is 30%.
What is the firm's cost of equity estimate according to the DCF method?
What is the firm's cost of equity according to the CAPM? On the basis of your answers to parts a and b, what would be your final estimate for the firm's cost of equity?
What is your estimate for the firm's corporate cost of capital?