St. Vincent’s Hospital has a target capital structure of 35 percent debt and 65 percent equity. Its cost of equity (fund capital) estimate is 13.5 percent and its cost of tax-exempt debt estimate is 7 percent. What is the hospital’s corporate cost of capital?
Richmond Clinic has obtained the following estimates for its costs of debt and equity at various capital
Percent Cost of Cost of
Debt Debt Equity
20% 6.6% 17%
40% 7.8% 19%
60% 10.2% 22%
80% 14.0% 27%
What is the firm’s optimal capital structure? (Hint: Calculate its corporate cost of capital at each structure. Also, note that data on component costs at alternative capital structures are not reliable in real-world situations.)
Morningside Nursing Home, a single not-for-profit facility, is estimating its corporate cost of capital. Its tax-exempt debt currently requires an interest rate of 6.2 percent, and its target capital structure calls for 60 percent debt financing and 40 percent equity (fund capital) financing. The estimated costs of
equity for selected investor-owned healthcare companies are given below:
Glaxo Wellcome 15.0%
Beverly Enterprises 16.4%
- What is the best estimate for Morningside’s cost of equity?
- What is the firm’s corporate cost of capital?