Medical 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 firms last dividend (D0) was $2, and its current stock price is $23. The firms 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 firms target capital structure calls for 50% debt financing, the interest rate required on the businesss 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 firms cost of equity?