Southern homecare cost of capital case

Is the divisional cost of capital applicable for all projects within that division? Specifically, he wants you to develop divisional costs of capital in addition to the overall corporate cost of capital.

The firm, over the last few years, has had a 20 percent average return on equity and has paid out about 50 percent of its net income as dividends. Southern homecare cost of capital case is the T-bond Treasury bond rate used to proxy the risk-free rate rather than the T-bill rate?

Using your answer to Question 8a and the data in Exhibit Use the discounted cash flow method to obtain a cost-of-equity estimate. How can the market risk premium be estimated?

What other methods could be used to estimate the cost of debt? Third, the founders of Southern are very concerned about the threat posed by home health care businesses started by not-for-profit hospitals because they have both cost in the sense that they do not pay dividends and tax advantages.

Any new long-term debt issued by the company will likely have a year maturity. Browse hundreds of Finance tutors. Should historical embedded or new marginal values be used? Discuss how differential debt capacities could be incorporated into the divisional costs of capital.

To help assess the threat, Clark has asked you to use the information developed for Southern, along with the not-for-profit hospital data contained in Exhibit What specific items of capital should be included in a corporate cost of capital estimate? First, it is clear that cost of capital estimates are subject to significant uncertainty.

In addition to the standard analysis, several issues related to the cost of capital estimate were raised at the last executive committee meeting. Which set of weights should be used in the corporate cost of capital estimate?

If the estimate is not valid, how might it be adjusted to remove any bias? How much confidence do you have in the cost of capital estimate? Why is there a cost associated with retained earnings?

Clark wondered if this should be a matter of concern. Use the CAPM to produce a cost of equity for each division, and assume the same corporate tax rate and debt cost for each division. Browse hundreds of Finance tutors. Should the stated nominal cost of debt or the effective annual rate be used?

Second, the divisional presidents expressed concern that a single cost of capital will be applied across the company, regardless of any divisional risk differences. Should flotation costs be included in the cost-of-debt calculation?

How valid is an estimate of the cost of debt based on year bonds? Estimate the divisional cost of capital for each Southeastern division assuming that both divisions have the same optimal target capital structure. Note that the risk premium used here is not the market risk premium, which is applied to the risk-free rate.

You will have to meet with the financial VP and, possibly, with the president and the full board of directors including the founders and the finance professor to present your findings and answer any questions they might have. Clark has asked you to be sure to address their concerns.What is your estimate for Southern’s corporate cost of capital?

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Essay on Southern Homecare Cost Of Capital Case Words | 5 Pages SOUTHEASTERN HOMECARE Cost of Capital Background Southeastern Homecare was initially a taxable partnership owned organization run by three partners, but later due to lack of capital and the rapid growth of the organization, the company was incorporated.

Marriot Corp Case: Cost of Capital Words | 5 Pages. are in Washington, D. C. The vice president of project finance at Marriott Corporation, prepares recommendations annually for the hurdle rates at each of the firm¡¯s three divisions.

View Southern Homecare Corporate Cost of Capital Group PPT Case Study from BUSINESS at University of Houston. Southern Homecare: Corporate Cost of Capital ARMY-BAYLOR UNIVERSITY GRADUATE PROGRAM.

Background.

Southeastern Homecare was initially a taxable partnership owned organization run by three partners, but later due to lack of capital and the rapid growth of the organization, the company was incorporated and the stocks were sold to the public.

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Southern homecare cost of capital case
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