Golden State Home Health, Inc., is a large, California-based forprofit home health agency. Its dividends are expected

Question:

Golden State Home Health, Inc., is a large, California-based forprofit home health agency. Its dividends are expected to grow at a constant rate of 5 percent per year into the foreseeable future.

The firm’s last dividend (D0) was $1, and its current stock price is

$10. The firm’s beta coefficient is 1.2; the rate of return on 20-year T-bonds currently is 4 percent; and the expected rate of return on the market, as reported by a large financial services firm, is 8 percent. Golden State’s target capital structure calls for 60 percent debt financing, the interest rate required on its new debt is 9 percent, and the firm’s tax rate is 30 percent.

a. What is the firm’s cost-of-equity estimate according to the DCF method?

b. What is the cost-of-equity estimate according to the CAPM?

c. On the basis of your answers to parts a and

b, what would be your final estimate for the firm’s cost of equity?

d. What is your estimate for the firm’s CCC?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Question Posted: