whats the constant growth rate for the discounted cash flow? Southeastern Homeca
ID: 2763340 • Letter: W
Question
whats the constant growth rate for the discounted cash flow?
Southeastern Homecare Cost of Capital:
Balance sheet (millions of dollars
Cash and marketable securities
$2.5
Accounts payable
$1.1
Accounts receivable
5.9
Accruals
1.0
Inventory
1.3
Notes payable
0.2
Current assets
9.7
Current liabilities
2.3
Net Fixed Assets
32.9
Long-term debt
20.0
Common stock
20.3
Total Assets
42.6
Total liabilities
42.6
Income statement
Net revenue
$80.6
Cash expenses
71.8
Depreciation
2.8
Taxable income
6.0
Taxes
2.4
Net income
3.6
Dividends
1.8
Additions to retained earnings
1.8
1. Southern’s long-term debt consists of 7.5 percent coupon, BBB-rated, semiannual payment bonds with 15 years remaining to maturity. The bonds recently traded at a price of $956.31 per $1,000 par value bond. The bonds are callable in five years at par value plus a call premium of one year’s interest, for a total of $1,075.
2. The founders have an aversion to short-term debt, so the company uses such debt only to fund cyclical working capital needs. The company’s financial plan calls for the issue of 30-year bonds to meet long-term debt needs.
3. Southern’s federal-plus-state tax rate is 40 percent.
4. Southern’s last dividend (D0) was $0.17, . Southern’s common stock now sells at a price of $5.25 per share. The company has 10 million common shares outstanding.
5. Over the last few years, Southern has averaged a 20 percent return on equity and has paid out about 50 percent of its net income as dividends.
6. The current yield curve on U.S. Treasury securities is as follows:
Term to maturity
Yield
3 months
2.5%
6 months
3
9 months
3.3
1 year
3.5
5 years
4.0
10 years
4.5
15 years
4.8
20 years
5.0
25 years
5.1
30 years
5.2
7. A prominent investment banking firm has recently estimated the expected rate of return on the S&P 500 Index to be 11 percent.
8. Southern’s historical beta, as measured by several analysts who follow the stock, falls in the range of 1.3 to 1.5.
9. The required rate of return on an average (A-rated, beta = 1.0) company’s long-term debt is 7 percent.
10. Southern’s market value target capital structure calls for 35 percent long-term debt and 65 percent common stock.
EXHIBIT 16.2: Selected Not-for-Profit Hospital Data
Average Long-Term Capital Structure:
30 percent debt
70 percent equity (fund capital)
Average Cost of Debt:
Interest rate on A-rated tax-exempt bonds = 5.0%
Balance sheet (millions of dollars
Cash and marketable securities
$2.5
Accounts payable
$1.1
Accounts receivable
5.9
Accruals
1.0
Inventory
1.3
Notes payable
0.2
Current assets
9.7
Current liabilities
2.3
Net Fixed Assets
32.9
Long-term debt
20.0
Common stock
20.3
Total Assets
42.6
Total liabilities
42.6
Explanation / Answer
OR-
Average Beta =(1.30+1.50)/2= 1.40
Risk free rate (10 Year T bill) = 4.50%
Market Return =11%
Cost of Equity (CAPM) =Rf+beta(Rm-Rf)
= 4.50+ 1.40(11-4.50) = 13.60%
Last Dividend =0.17
Next Dividend = last Dividend*(1+growth rate)
Current Price of Stock = Next Dividend/(Cost of Equity-Growth Rate)
$5.25 = {0.17 *(1+g)}/ (.1360-g)
Constant Growth Rate = 8.10%
Net Income After Tax $3,600,000.00 Less: Dividend $1,800,000.00 Retained Earning $1,800,000.00 Retantion Ratio 50% ROE 20% Growth Rate (ROE*Ret. Ratio) 10.0%Related Questions
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