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What would be final estimate for the firm cost of equity

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Reference no: EM132961963

Golden State Home Health, Inc., is a large, California-based for- profit 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 8 percent; and the expected rate of return on the market, as reported by a large financial services firm, is 14 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.

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

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

Problem 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?

Problem d. What is your estimate for the firm's corporate cost of capital?

Reference no: EM132961963

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