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Assignment #4 � Medical Associates-Escarsega

Assignment #4 � Medical Associates-Escarsega - 1...

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1 Medical Associates Medical Associates Teresa Escarsega Dr. Laura Forbes HSA 525 7 November, 2010
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2 Medical Associates 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%. 1. Calculate Medical Associates’ cost of equity estimate using the DCF method. The company’s current stock price, Po, is $23, and its next expected annul dividend, E(D1), is $2. Thus, the firm’s Discounted Cash Flow (DCF) estimate of R(Re), according to the DCF model is: R(Re) = E(D1)/Po +E(g). Answer 1 Last dividend 2 Dividend growth rate 7% Current stock price 23 AS per DDM, Re = D1/P0 + g 16.30% 2. Calculate the cost of equity estimate using the Capital Asset Pricing Model (CAPM).
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