case study 42

1. What would be the cost of equity of Marshland General if its market risk is similar to that of National Health Company, shown in exhibit 22.4. Assume that the risk free rate is the 20 year U.S Treasury yield also given in exhibit 22.4. One difference however is the Marshall General is a non-taxable institution and its debt/asset ratio is .50. (Hint: refer to the Hamada equation given chapter 9.

2. What is the corporate cost of debt of Marshall General if its bond is trading at $920 with a coupon rate of 5% of a par value of $1,000 and a maturity of 20 years?

3. What is Marshall’s corporate cost of capital given the debt/asset ratio given in question 1?

4. What is the value of Marshall’s equity based on the present value of future cash flows (Net income + depreciation) starting in year 2010 if we assume a growth rate of those cash flows to be 5% indefinitely? Assume we are at the end of year 2009 (see figures in exhibit 22.2) and that the cost of equity (discount rate) is the one you calculated in question 1. (Ignore the effect of debt on the cost of equity)

5. If we used the EBITDA market multiple based on that of National Health Company, what would be the value of Marshall if we used the average EBITDA for the period 2005-2009?

please answer this section for the case study 22

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