StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Medical Associates - Research Paper Example

Summary
This discussion, Medical Associates, stresses that the Capital Asset Pricing Model (CAPM) provides the required return based on the perceived level of systematic risk of an investment. The CAPM contends that shares move accordingly with the market. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91.3% of users find it useful
Medical Associates
Read Text Preview

Extract of sample "Medical Associates"

 1. Calculate Medical Associates’ cost of equity estimate using the DCF method.  The cost of equity using DCF method can be calculated as follows: Where: = Cost of Equity = Dividend per share (for next year) = Current Market Value of Stock g = Growth Rate of Dividends Hence the cost of equity will be; = 2 * (1 + 0.07) = $2.14 = (2.14 ÷ 23) + 0.07 = 0.163 or approximately 16% (Investopedia.com) 2. Calculate the cost of equity estimate using CAPM. The cost of equity using the Capital Asset Pricing Model (CAPM) can be calculated as follows; Where; = Risk free rate or the rate on Government Bonds E(= Expected return on the market = Project beta = systematic risk of the investment compared to market. = 0.154 or approximately 15% 3. On the basis of your answers to #1 & #2, what is your final estimate for the firm’s cost of equity? The Capital Asset Pricing Model (CAPM) provides the required return based on the perceived level of systematic risk of an investment. The CAPM contends that shares move accordingly with the market. If the market moves by 1% and a share has a beta of two, then the return on the share would move by 2%. The beta indicates the sensitivity of the return on shares with the return on the market. The beta value of 1 is the benchmark against which all share betas are measured, theses shares usually follow the market trend. If the beta value is more than 1, the shares are considered to be aggressive, these type of shares have the tendency to move faster than the market in a rising (bull) market and fall more than the market in a declining (bear) market. If the beta is less than 1, it is deemed to be a defensive share, these shares generally experience smaller than average gains in a rising market and smaller than average falls in a declining market. (Brigham, 2010) Research has shown that CAPM is a widely practiced valuation model. For Medical Associates, the cost of equity according to the DCF method is around 16% whilst it is lower when calculated in accordance with the Capital Asset Pricing Model. If the cost of equity is higher, it would definitely increase the Weighted Average Cost of Capital or the Corporate Cost of Capital. Hence the value calculated in accordance with the CAPM is a better and a good estimation of the cost of the equity for the company. 4. Calculate the firm’s estimate for corporate cost of capital. The cost of equity figure calculated as per the CAPM technique can further be used to find the Corporate Cost of Capital. Corporate Cost of Capital can be calculated as follows: Where: = Value of equity = Value of debt = Cost of debt = 0.105 or 10% approximately. 5. Describe the four (4) steps of capital budgeting analysis. Capital budgeting is the process of identifying, analyzing, prioritizing different sources of funds to finance a particular project. It is further explained as “the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark”. (Investopedia.com)   Capital budgeting is also branded and known as “Investment Appraisal”. The four major steps in the capital budgeting process are: Estimating the cash flows; The cash inflows and the outflows associated with the proposed project are to be estimated and evaluated. The cash flows should be estimated with accuracy, although it is always a matter of prediction and may not be completely accurate. All monetary costs and benefits associated with the project are to be analysed. Some costs may not be included in the capital budgeting technique e.g. Sunk costs. The riskiness of the cash flows should be assessed; The risk associated with the project should be assessed and proper measures should be taken to address that particular risk. The main cash flow risks affiliated with any business venture are inflation risk, interest rate risk, volatility of the cash flows, etc. Determine the appropriate discount rate The discount rate calculated addresses the costs of individual sources of capital for a company e.g. in the form of debt or equity finance. Each of the sources of fund acquired for the initial and the subsequent financing of a project would have certain costs and for that reason the discount rate should be ascertained. Find the Present Value of the Expected Cash flows The expected cash flows would be multiplied accordingly with the discount rate and the present values would be ascertained. Present value is the current value of a sum of money which would be incurred or received in the nearby future. The expected cash flows are discounted at the discount rate, the higher the discount rate, the lower the present value of the future cash flows. After all these steps, it is finally decided whether to progress with a particular project or not. 6. Describe how project risk is incorporated into a capital budgeting analysis.  Risk simply means that the future actual return may vary from the expected return. The total risk of a project comprises of systematic and the unsystematic risk. Unsystematic risk refers to the impact on a company’s cash flows of largely random activities e.g. Industrial relation problems, equipment failure, etc. Systematic risk on the other hand are general economic factors that affect the cash flows of companies, this type of risk can occur from factors such as inflation, tax rate increase, interest rate factors, etc. such project risk are incorporated into the capital budgeting analysis to give a better picture of the project e.g. inflation rates are estimated and measured and all cash flows which are subject to inflation changes are calculated accordingly. The inflation rate is multiplied with the necessary cash flows with regards to the time period as well. Once all the cash flows are inflated by its specific inflation rates, the resulting cash flows are converted into money flow i.e. they are discounted using the money rate. Except the inflation issue the other issue is the tax issue. Corporation tax is calculated on the cash inflows and besides that, any capital allowances or tax savings are also ascertained and added up in the capital budgeting analysis. (Brigham, 2010) References Brigham, E. F. (2010). Financial management: Theory and practice. Toronto: Nelson Education Capital Budgeting, Investopedia.com http://www.investopedia.com/terms/c/capitalbudgeting.asp Cost of Equity, Investopedia.com http://www.investopedia.com/terms/c/costofequity.asp Read More

CHECK THESE SAMPLES OF Medical Associates

Correlational Methods

Respondents were enrolled through the Central Virginia Community Health Center in Buckingham County and the University Medical Associates Clinic at University of Virginia, after official agreement was received from the respondents' nurses and physicians.... The research was completed by a team of clinical professionals from a variety of medical institutions, including the Massachusetts General Hospital, Central Virginia Community Center, Washington University, and others....
2 Pages (500 words) Book Report/Review

A Syndrome of High Blood Pressure

The paper "A Syndrome of High Blood Pressure" highlights that there are several ways for physicians to diagnose and treat Primary and Secondary Aldosteronism.... Many patients who are treated for these conditions are likely to respond successfully to treatment.... ... ... ... The outlook for Secondary Aldosteronism depends on the primary condition causing it....
7 Pages (1750 words) Research Paper

Patient Autonomy and Consent

This paper ''Patient Autonomy and Consent'' tells us that healthcare practice entails the provision of medical services to individuals to maintain their wellbeing.... In most circumstances, these professionals are trained individuals who have acquired the skills required in the delivery of medical services.... In teamwork, consultations with the stakeholders in all situations ensure smooth management of operations within medical facilities.... At times, he should ensure the use of correct equipment when performing medical procedures....
6 Pages (1500 words) Essay

The Harvard Community Health Plan

This essay analyzes the Harvard Vanguard Medical Associates, that was established back in the late 1960s.... Basically, the Harvard Vanguard Medical Associates is a non-profit organization that provides different specialty medical practices to adult and pediatric patients throughout its 20 offices.... In order to deliver high-quality healthcare services to the patients, Harvard Vanguard is focused on establishing a partnering relationship with its patients and community members (Harvard Vanguard Medical Associates, 2012c)....
7 Pages (1750 words) Essay

JP Morgan Chase - Elements of a Valid Contract

Medical Associates of Bristol County, Inc.... The paper "JP Morgan Chase - Elements of a Valid Contract" discusses that there is still a lack of 'a centralized data protection framework' in the U.... .... but only relies on the data security provided under 'section 5 of the Federal Trade Commission (FTC) Act for deceptive and unfair practices'....
5 Pages (1250 words) Essay

Work Place Assesment: Harvard Vanguard Medical Associates

"Work Place Assessment: Harvard Vanguard Medical Associates" paper studies Organizational Behavior attributes so as to identify the organizational functions of the organization.... Harvard Vanguard Medical Associates (HVMA) is a non-profit-oriented organization, performing broad sphere medical group practices along with providing utmost care to a significant amount of both adult and pediatric patients.... The organization employs a significant amount of employees, physicians, and other healthcare experts who are fully committed to making it easier for the patients to stay fine and healthy (Harvard Vanguard Medical Associates, 2011)....
7 Pages (1750 words) Case Study

Cash Flow Estimation for Pinehill Medical Associates

"Cash Flow Estimation for Pinehill Medical Associates" paper reflects on the analysis of medical facilities on the basis of selected decision-making criteria for choosing the profitable medical facility for Cash Flow Estimation for Pinehill Medical Associates (PMA).... Pinehill medical Associate (PMA) needs to prepare a cash flow estimation for evaluating the investment decision of opening a former medical facility and building a new medical facility....
2 Pages (500 words) Essay

Difficulties of Multinationals in Carrying Out Transactions

This essay "Difficulties of Multinationals in Carrying Out Transactions" examines a business organization that carries out the functions of financing, production, sales, and research and development.... Some MNCs grant foreign companies a license to use their technology instead of setting up their own....
8 Pages (2000 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us