Morningside Nursing Home, a not-for-profit corporation, is estimating its corpor
ID: 2777648 • Letter: M
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 6.2 percent, and its target capital structure calls for 60 percent debt financing and 40 percent equity (fund capital) financing. The estimated costs of equity for selected investor-owned healthcare companies are as follows:
GlaxoSmithKline
15.0%
Long-Term Care Corporation
16.4
HEALTHSOUTH
17.4
Humana
18.8
a. What is the best estimate for Morningsides cost of equity?
b. What is the firm's corporate cost of capital?
Please show specific steps to calculating this problem.
GlaxoSmithKline
15.0%
Long-Term Care Corporation
16.4
HEALTHSOUTH
17.4
Humana
18.8
Explanation / Answer
a)
Best estimate is average of cost of equity:
= (15%+16.4%+17.4%+18.8%)÷4
= 16.9%
b)
Corporate cost of capital:
= Wd×Kd+We×Ke
= 16.9%×0.40+6.2%×0.60
= 10.48%
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