Assume that HCA is evaluating the feasibility of building a new hospital in an area not...

Assume that HCA is evaluating the feasibility of building a new hospital in an area not currently served by the company. The company's analysts estimate a market beta for the hospital project of 1.1, which is somewhat higher than the 0.8 market beta of the company's average project. Financial forecasts for the new hospital indicate an expected rate of return on the equity portion of the investment of 20 percent. If the risk-free rate, RF, is 7 percent and the required rate of return on the market, R(Rm), is 12 percent, is the new hospital in the best interest of HCA's shareholders? Explain your answer.

Expert Solution

Risk Free Rate (R_F) = 7%

Market Return (R_M) = 12%

Beta = 1.1

Required Return R(Re) = Risk Free Rate + Beta (Market Return – Risk Free Rate)

= 7% + 1.1 (12%-7%)

= 0.07 + 1.1 (0.05)

= 12.5%

Since, the expected return on the investment is 20% is greater than the Required return of 12.5%, HCA should invest in the hospital to benefit its shareholders.

jeff jeffy answered 2 years ago

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