Morningside nursing Home, a not-for-profit corporation, 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 health care companies are given below:
GlaxoWellcome 15%
Beverly Enterprises 16.4%
HEALTHSOUTH 17.4%
Humana 18.8%
a. What is the best estimate for Morningside's cost of equity?
b. What is the firm's corporate cost of capital?