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# Medical Associates is a large for-prot group practice. Its dividendsare expected to grow at a constant rate of 7 percent per year into theforeseeable...

Medical Associates is a large for-proﬁt group practice. Its dividendsare expected to grow at a constant rate of 7 percent per year into theforeseeable future. The ﬁrm’s last dividend (D0) was $2, and its currentstock price is $23. The ﬁrm’s beta coefﬁcient is 1.6; the rate of returnon 20-year T-bonds currently is 9 percent; and the expected rate of return on the market, as reported by a large ﬁnancial services ﬁrm, is13 percent. The ﬁrm’s target capital structure calls for 50 percent debtﬁnancing, the interest rate required on the business’s new debt is 10percent, and its tax rate is 40 percent.a. What is Medical Associates’s cost of equity estimate according to theDCF method?b. What is the cost of equity estimate according to the CAPM?c. On the basis of your answers to Parts a and b, what would be yourﬁnal estimate for the ﬁrm’s cost of equity?d. What is your estimate for the ﬁrm’s corporate cost of capital?