Califorina Clinics

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Name-----Shabana Ambreen Assignment #3 :California Clinics Date-----02/16/11 Course------HEALTH FINANCIAL MANAGEMENT Instructor------CORRIE STRUBLE

Assignment #3 – California Clinics (Due February 16, 2011) California Clinics, an investor-owned chain of ambulatory care clinics, just paid a dividend of \$2 per share. The firm’s dividend is expected to grow at a constant rate of 5% per year, and investors require a 15 % rate of return on the stock. 1. Given: D₀= the most resent dividend which is = \$2.00 per share. E (g) = The constant growth rate = 5% = 0.05 per year. R(Re) = Investors rate of return on the stock = 15% = 0.15 Formula used E (P₀) = D₀ x (1 + E (g)) / (R(Re)-E(g)) E (P₀) = \$2.00 x ( 1+ 0.05) / (0.15- 0.05) E (P₀) = \$2.00 x ( 1.05) / ( .1) E (P₀) = \$2.10 / .1 E (P₀) = \$ 21.00 There for the stock value is \$21.00 What is the stock’s value?

Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13%. Under these conditions, what is the stock’s value? Given: D₀= the most resent dividend which is = \$2.00 per share. E (g) = The constant growth rate = 5% = 0.05 per year. R(Re) = Investors rate of return on the stock = 13% = 0.13 Formula used E (P₀) = D₀ x (1 + E (g)) / (R(Re)-E(g)) E (P₀) = \$2.00 x ( 1+ 0.05) / (0.13- 0.05) E (P₀) = \$2.00 x ( 1.05) / ( .08) E (P₀) = \$2.10 / .08

E (P₀) = \$ 26.25 There for the stock value will increase due to the the required rate of return to falling which: \$26.25

Return to the original 15% required rate of return and assume a dividend growth rate estimate increase to 7% per year, what is the stock value? Given: D₀= the most resent dividend which is = \$2.00 per share. E (g) = The constant growth rate = 7% = 0.07 per year. R(Re) = Investors rate of return on the stock = 15% = 0.15 Formula used E (P₀) = D₀ x (1 + E (g)) / (R(Re)-E(g)) E (P₀) = \$2.00 x ( 1+ 0.07) / (0.15- 0.07) E (P₀) = \$2.00 x ( 1.07) / ( .08) E (P₀) = \$2.14 / .08 E (P₀) = \$ 26.75 There for the stock value is \$26.75 Explain how each of the four (4) fundamental factors that affect the supply and demand for investment capital, and hence, interest rates, (namely productive opportunities, time preferences for consumption, risk, and inflation) affects the cost of money. The four (4) fundamental factors that affect the supply and demand for investment capital, and hence, interest rates, (namely productive opportunities, time preferences for consumption, risk, and inflation) affects the cost of money. 1. Investment opportunities: This concept deals with higher the profit a person gain from the business the more interest rate they can afford to pay off their debt. For example, In today's market only true wealth you can have is money and bonds, therefore the money is use to purchases bonds and bonds are redeemed for money. They are both different in some way, money usually pays very small interest rate some times not at all and it is also use to purchases goods and serveries on the other hand bands do pay interest rate and you cannot purchases any goods and serveries unless you convert the bond in to cash. Therefore people use some of their money to buy bonds, if the bonds' interest rate increases the demand for bonds will increase as well. Due to supply demand relationship as the demand of bonds will increase the supply will decrease. 2. Time Preferences for Consumption: This consept deals with future and currnt

References Berkowitz, Eric N. 2010, PhD, Essentail of Healthcare Marketing, 2nd ed, The University of Massachusetts.

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