Question 1: Explain the difference between cash and accrual accounting. Be sure to include a discussion of the revenue recognition and matching principles.
Question 2: Explain the following accounting terms for healthcare providers:
(1) What is the difference between Gross Revenue and Net Revenue?
(Hint: Think about discounts and charity care)
(2) What is the difference between Charity Care and Bad Debt Losses? How is each handled on the income statement?
Question 3: Briefly describe healthcare provider incentives and risks under each of the following reimbursement methods:
(1) Charge-based
(2) Per procedure, per diagnosis and per diem are typical Prospective Payment methods. Under the Prospective payment system, what are providers' incentives and risks?
(3) Capitation
Question 4: Brandywine Homecare, a for-profit corporation, had revenues of $12 million in 2007. Expenses other than depreciation totaled 75% of revenues, and depreciation expense was $1.5 million. All revenues were collected in cash during the year and all expenses other than depreciation were paid in cash. Brandywine Homecare must pay taxes at a rate of 40% of pretax income.
(1) What were Brandywine's net income, total profit margin, and cash flow?
(2) Suppose the company changed its depreciation calculation procedures (still within GAAP) such that its depreciation expense doubled. How would this change affect Brandywine's net income, total profit margin, and cash flow?
Question 5: Answer the following questions
(1) What are the three primary bond rating agencies?
(2) What do bond ratings measure?
(3) Discuss the importance of bond ratings to investors.
(4) Discuss the importance of bond ratings to businesses that issue bonds.
Question 6: State whether this statement is true or false and explain your answer: "The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices."
Question 7: Regal Health Plans issued municipal bonds with 10-year time to maturity and 8% coupon rate semiannually. An investor is subject to 30% tax bracket. For this investor, to invest in a corporate bond with the same bond rating and a yield of 10% is the same as to invest in the municipal bond issued by Regal Health Plans. (Bonds face value is $1,000)
(1) What is the municipal bond's yield?
(2) What is the current price of the municipal bonds issued by Regal Health Plans? Is it discount or premium bond?
(3) The investor bought the municipal bonds. One year later, the interest rate falls and the bond yield changes to 6%. What is the investor's current yield? (4 points) What is the investor's capital gain yield?
Question 8: The stock of Physicians Care Network (PCN) has a beta of 2.0. Assume that the risk-free rate is 4% and the market risk premium is 6%. PCN paid last dividend of $1.80 and the stock is currently traded at $19.80. What is the estimated growth rate?
Question 9: Winston Clinic is evaluating whether to install a new MRI machine, which worth about $1 million. The hospital plan to use this machine for 15 years and the salvage value is about $150,000. The hospital estimated the possible income generated by the MRI machine. The first five years will be $100,000. The next 10 years will be about $150,000. And the cost of capital for Winston Clinic is 7.09%.
(1) What is the net present value of this MRI project? Should Winston Clinic accept this project?
(2) What is the internal rate of return of this project? Should Winston Clinic accept this project?
(3) In order to improve the accuracy of decision, Winston Clinic used scenario analysis to evaluate the project. The followings are possible cash flows under different scenarios with corresponding probabilities:
- Probability Cash Flows
- Best 20% $120,000 in the first five years, $180,000 in the next ten years
- Average 60% $100,000 in the first five years, $150,000 in the next ten years
- Worst 20% $70,000 in the first four years, $100,000 in the next ten years
- Using the same corporate cost of capital at 7.09%, what is the expected NPV of this project? Would Winston Clinic still accept this project?