Assuming you are the financial manager of a for-profit hospital, what is the hos

Question

Assuming you are the financial manager of a for-profit hospital, what is the hospital's cost of capital assuming that the hospital has the following capital structure on its Statement of Financial Position (SFP; also known as a Balance Sheet):

Long-Term Debt: $300M; current Yield to Maturity (YtM) of 6.5%, selling at par.

Preferred Stock: $200M; coupon yield of 10%, currently selling below face value at $9,975 for every $10,000 bond.

Common Stock: $700M; par value of $5 per share; current price of $70 per share, dividend of $12 per share.

Tax rate: 41.5%

Explanation / Answer

To solve this, you have to treat preferred stock as debt... WACC = MVe*rE + MVd*rD(1-tc) as there are 2 types of debt, must find an average pro rata its market value MVd = 300M + (9975/10000)*200M = 300M + 199.5M = 499.5M rD = (300/499.5)*0.065 + (199.5/499.5)*0.1 = 0.078979 MVe: 700M/$5 per share = 140M shares 140M shares @ 70 each = 9800 (presuming ex div) 12/70 = 0.1714285 total debt = 499.5M; rD = 7.8979% total equity = 9800M; rE = 17.14% WACC = [499.5/(499.5+9800)]*0.078979*(1-0.415) + [9800/(499.5+9800)]*0.1714285 = 0.165355 or 16.54%

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