Morningside Nursing Home, a not-for-profit corporation, is estimating its corporate cost of capital. Its tax-exempt debt currently requries an interst rate of 6.2 percent and its target capital structure calls for 60 percent debt fianancing and 40 percent equity (fund capital) financing. The estimated costs of equity for selected investor-owned healthcare comapnies are given below:
Glaxo Wellcome 15.0%
Beverly Enterprises 16.4
HealthSouth 17.4
Humana 18.8
1. What is the best estimate for Morningside's cost of equity?
2. what is the firm's corporate cost of capital?
Please note that Jiskha has no volunteer teachers who are finance experts.
okay, any step in the right direction would help
what is the tax rate
To estimate Morningside Nursing Home's cost of equity, we need to use the average cost of equity of the selected investor-owned healthcare companies provided. Since the target capital structure calls for 40% equity financing, we'll use the weighted average cost of equity.
Step 1: Calculate the weighted average cost of equity.
Weighted Average Cost of Equity = (Cost of Equity 1 * Weight 1) + (Cost of Equity 2 * Weight 2) + ...
Using the given data, we'll calculate the weighted average cost of equity.
Weighted Average Cost of Equity = (15.0% * 1.0/4) + (16.4% * 1.0/4) + (17.4% * 1.0/4) + (18.8% * 1.0/4)
Step 2: Calculate the firm's corporate cost of capital.
Corporate Cost of Capital = (Weight of Debt * Cost of Debt) + (Weight of Equity * Cost of Equity)
Since the target capital structure calls for 60% debt financing and 40% equity financing, we'll use these weights in the calculation.
Corporate Cost of Capital = (60% * Cost of Debt) + (40% * Weighted Average Cost of Equity)
Now, let's substitute the given values and calculate the answers.
1. Morningside's estimated cost of equity:
Weighted Average Cost of Equity = (15.0% * 1.0/4) + (16.4% * 1.0/4) + (17.4% * 1.0/4) + (18.8% * 1.0/4)
Add the values and calculate the result.
2. The firm's corporate cost of capital:
Corporate Cost of Capital = (60% * Cost of Debt) + (40% * Weighted Average Cost of Equity)
Substitute the given values and the calculated value from step 1, and calculate the result.