UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 5ed
Securities Valuation, Market Efficiency and Debt Refunding
PROBLEM 1:
Assume Venture Healthcare sold bonds that have a ten-year maturity, a 12 percent coupon rate with annual payments, and a $1,000 par value.
a. Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent. What would be the bond's value?
b. Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. What would be the bond's value?
c. What would be the value of the bonds three years after issue in each scenario above, assuming that interest rates stayed steady at either 7 percent or 13 percent?
Equity Financing and Investment Banking; -- Securities Valuation, Market Efficiency, and Debt Refunding
PROBLEM 2:
A person is considering buying the stock of two home health companies that are similar in all respects except for the proportion of earnings paid out as dividends. Both companies are expected to earn $6 per share in the coming year, but Company D (for dividends) is expected to pay out the entire amount as dividends, while Company G (for growth) is expected to pay out only one-third of its earnings, or $2 per share. The companies are equally risky, and their required rate of return is 15 percent. D's constant growth rate is zero, and G's is 8.33 percent. What are the intrinsic values of Stocks D and G?
PROBLEM 3:
Medical Corporation of America (MCA) has a current stock price of $36, and its last dividend (D0) was $2.40. In view of MCA's strong financial position, its required rate of return is 12 percent. If MCA's dividends are expected to grow at a constant rate in the future, what is the firm's expected stock price in five years?
PROBLEM 4:
Suncoast Healthcare is planning to acquire a new x-ray machine that costs $200,000. The business can either lease the machine using an operating lease or buy it using a loan from a local bank. Suncoast's balance sheet prior to acquiring the machine is as follows:
Current assets $100,000 Debt $400,000
Net fixed assets $900,000 Equity $600,000
Total assets $1,000,000 Total claims $1,000,000
a. What is Suncoast's current debt ratio?
b. What would the new debt ratio be if the machine were leased? If it is purchased?
c. Is the financial risk of the business different under the two acquisition alternatives?