Morningside nursing home,a not-for profit corporation,is estimating its corporat

Question

Morningside nursing home,a not-for profit corporation,is estimating its corporate cost of capital.Its tax-exempt debt currently requires an interest rate of 6.2percent and its target capitalstructure call for 60 percent debt financing and 40 percent equity(fund capital) financing The estimate cost ofequity for selected invester-owned health care companies are given below

ABC 15.0%
BCD 16.4
CDE 17.4
DEF 18.8

A. )what is the best estimate for Morningside's cost of equity?

B.) what is the firm's corporate cost of capital?

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Explanation / Answer

a.the best estimate for Morningside's cost of equity=(15.0% +16.4 %+17.4%+18.8 %)/4 =16.90% b. cost of capital =16.90%*40% +6.2%*60% =10.48%

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