Medical Associates Is a Large For-Profit Group Essay

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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%.

You are to write a report that answers the following:

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

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Next years expected dividend = $2 * 1.07 = 2.14

Current Stock Price = $

E (Rc) = 2.14/23 + .07 = .1630 = 16.3%

Calculate the cost of equity estimate using CAPM.

R (Rc) = .09 + (1.6 * .013) = .1108 = 11.1%

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

The two approaches have produced what can be considered a range for the actual cost of equity. A more accurate.....

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