Cases in Healthcare Finance Case 16 Solution Case 16 - 1 CASE 16 SOLUTION (11/17/10) Copyright  2010 by FACHE
SOUTHERN HOMECARE
Cost of Capital
Case Information
Type
This case is nondirected, in that it does not contain a specific list of questions that students must answer. Rather, the case contains general guidance or concerns expressed by various parties that students should consider when developing their solutions. If you, as the instructor, want to convert this case to a directed case, and hence provide your students with very specific guidance questions, you can make available the applicable questions for this case contained in the Case Questions section of the online material for instructors.
Purpose
This case focuses on the estimation of the cost of capital for a business. There is minimal quantitative analysis required, but there are a significant number of conceptual issues that are addressed in the case.
Complexity
The calculations are not complex, but many of the issues merit a great deal of discussion and require a sound understanding of cost of capital principles.
Model Description
The model takes much of the busywork out of the case, so it enables students to spend more time on interpretation and evaluation. Like most case models, the student and instructor versions differ only in regards to the input data. The instructor’s version contains the complete base case inputs, while these inputs are zeroed out in the student version of the model.
The model uses market data relevant to both the business’s debt and equity as inputs to estimate the costs of debt and equity. Both YTM and YTC costs of debt are estimated, while the cost of equity is estimated using the CAPM, DCF, and Debt cost + Risk premium methods. Note that students must use judgment regarding which component cost estimates should be used in the corporate cost of