A relatively small medical group practice is trying to estimate

its corporate cost of capital. The practice is 100 percent equity

financed. The rate of return on 20-year Treasury bonds is currently

6 percent, and the expected rate of return on the market is 12

percent. A large practice management firm has a beta coefficient

of 0.9. Market research indicates that the cost of equity for very

small firms is approximately 4 percentage points higher than the

cost of equity for large firms. Moreover, the investors in the small

group practice face liquidity risk and thus determine that a liquidity

premium of 2 percentage points is appropriate.

a. What is the best estimate of the firm's corporate cost of capital?

b. How would the estimate of the corporate cost of capital change, if the success

of the medical group practice was highly dependent on the reputation of a single physician in the group? (Make sure to fully explain in detail)