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 healthcare companies are as follows:
GlaxoSmith Kline 15.0%
Long-Term Care Corporation 16.4%
HEALTHSOUTH 17.4%
Humana 18.8%
1. What is the best estimate for Morningside’s cost of equity?
2. What is the firm’s corporate cost of capital?