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Understanding Healthcare Financial Management

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9/1/2014 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 7 -- Equity Financing PROBLEM 1 A person is considering buying the stock of two home health companies that are similar in all respects except for the proportion of earnings paid out as dividends. Both companies are expected to earn $6 per share in the coming year, but Company D (for dividends) is expected to pay out the entire amount one year from now as dividends, while Company G (for growth) is expected to pay out only one-third of its earnings or $2 per share. The companies are equally risky, and their required rate of return is 15 percent. D's constant growth rate is zero and G's is 8.33 percent. What are the expected prices of Stocks D and G? ANSWER stock price=d1/(r-g) where: d1=value of dividends in the next period r= required rate of return g= rate of growth of dividends company D d1=$6 r=15% g=0% company d's value of stock will be= 6/(15%-0%)=6/(15%)=$40 company G d1=$2 r=15% g=8.33% company G's value of stock=2/(15%-8.33%)=2(6.67%)=$30 ount one year f its earnings UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 7 -- Equity Financing PROBLEM 2 Medical Corporation of America (MCA) has a current stock price of $36, and its last dividend (D0) was $2.40. In view of MCA's strong financial position, its required rate of return is 12 percent. If MCA's dividends are expected to grow at a constant rate in the future, what is the firm's expected stock price in five years? ANSWER expected stock price i ...
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