Morningside Nursing Home, a not for profit corporation, is estimating its corpor
ID: 2743985 • 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%, and its target capital structure calls for 60% debt financing and 40% equity (fund capital) financing. The estimated costs of equity for selected investor owned healthcare companies are as follows:
a. What is the best estimate for Morningside's cost of equity?
b. What is the firm's corporate cost of capital?
GlaxoSmithKline 15.0% Long Term Care Corporation 16.4% HEALTHSOUTH 17.4% Humana 18.8%Explanation / Answer
a.
The best estimate for M Nursing Home's cost of equity can be determined by taking an average of the estimated cost of equity for the selected investor owned healthcare companies.
Best estimate for M Nursing home's cost of capital
= (15.0% + 16.4 % + 17.4% + 18.8 %) / 4
=16.90%
b. The firm' cost of capital should be computed as follows:
Cost of capital = Cost of equity x weight + Cost of debt x weight
= 16.90% x 40% + 6.2% x 60%
= 10.48%
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