Southern Homecare Cost Of Capital Case 
SOUTHEASTERN HOMECARE
Cost of Capital
Background
Southeastern Homecare was initially a taxable partnership owned organization run by three partners, but later due to lack of capital and the rapid growth of the organization, the company was incorporated and the stocks were sold to the public. The company has two operating divisions: the Healthcare Services Division and the Information Systems Division. Both these divisions provide different services and operate individually. The Information Systems Division operates on a larger scale and competes with the market; it owns more business risk as compared to the other division. However, due to recent changes in the market and rising competition from the other home healthcare facilities and not-for-profits as well as reduced payments from the CMS has made the board of Southeastern Homecare to start developing their operating system by managing and analyzing the company’s cost of capital.
Thus, this case is focusses on estimating the cost of capital for Southeastern Homecare and also analyzes the several factors affecting it. It also allows estimating the divisional cost of capital for both of their operating divisions.
In this case, the corporate cost of capital needs to be analyzed and hence, to estimate that, a company’s long-term source of funds (common stock, long-term debts and preferred stock) should be used. Since the corporate cost of capital is used to make decisions today, which will affect the future cash flows, the only acceptable costs are today’s marginal costs that are used. These marginal values are the estimates of the cost of capital that will be raised in future which will provide an accurate estimation of raising the capital in future.
Southeastern Homecare has 7.5 percent coupon bonds with 15 years to maturity are currently selling at $956.31
$956.31 = PV, $37.50 = Semiannual coupon payment, 30 = Number of semiannual periods to maturity, $1,000 = Maturity value.
Cost of debt = before tax rate
Cost of Capital
Background
Southeastern Homecare was initially a taxable partnership owned organization run by three partners, but later due to lack of capital and the rapid growth of the organization, the company was incorporated and the stocks were sold to the public. The company has two operating divisions: the Healthcare Services Division and the Information Systems Division. Both these divisions provide different services and operate individually. The Information Systems Division operates on a larger scale and competes with the market; it owns more business risk as compared to the other division. However, due to recent changes in the market and rising competition from the other home healthcare facilities and not-for-profits as well as reduced payments from the CMS has made the board of Southeastern Homecare to start developing their operating system by managing and analyzing the company’s cost of capital.
Thus, this case is focusses on estimating the cost of capital for Southeastern Homecare and also analyzes the several factors affecting it. It also allows estimating the divisional cost of capital for both of their operating divisions.
In this case, the corporate cost of capital needs to be analyzed and hence, to estimate that, a company’s long-term source of funds (common stock, long-term debts and preferred stock) should be used. Since the corporate cost of capital is used to make decisions today, which will affect the future cash flows, the only acceptable costs are today’s marginal costs that are used. These marginal values are the estimates of the cost of capital that will be raised in future which will provide an accurate estimation of raising the capital in future.
Southeastern Homecare has 7.5 percent coupon bonds with 15 years to maturity are currently selling at $956.31
$956.31 = PV, $37.50 = Semiannual coupon payment, 30 = Number of semiannual periods to maturity, $1,000 = Maturity value.
Cost of debt = before tax rate