HCM 301, textbook is Gapenski & Pink (2015), excel math problems
Please complete the four math problems below.
9/1/14 |
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
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Chapter 6 — Debt Financing |
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PROBLEM 1 |
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Assume Venture Healthcare sold bonds that have a ten-year maturity, a 12 percent coupon rate with |
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annual payments, and a $1,000 par value. |
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a. Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent. What |
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would be the bond’s value? |
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b. Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. What |
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would be the bond’s value? |
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c. What would be the value of the bonds three years after issue in each scenario above, assuming that |
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interest rates stayed steady at either 7 percent or 13 percent? |
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ANSWER |
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
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Chapter 6 — Debt Financing |
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PROBLEM 3 |
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Tidewater Home Health Care, Inc., has a bond issue outstanding with eight years remaining to maturity, |
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a coupon rate of 10 percent with interest paid annually, and a par value of $1,000. The current market |
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price of the bond is $1,251.22. |
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a. What is the bond’s yield to maturity? |
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b. Now, assume that the bond has semiannual coupon payments. What is its yield to maturity in this |
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situation? |
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ANSWER |
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
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Chapter 6 — Debt Financing |
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PROBLEM 5 |
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Minneapolis Health System has bonds outstanding that have four years remaining to maturity, |
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a coupon interest rate of 9 percent paid annually, and a $1,000 par value. |
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a. What is the yield to maturity on the issue if the current market price is $829? |
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b. If the current market price is $1,104? |
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c. Would you be willing to buy one of these bonds for $829 if you required a 12 percent rate of return on |
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the issue? Explain your answer. |
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ANSWER |
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
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Chapter 9 — Cost of Capital |
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PROBLEM 5 |
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Morningside Nursing Home, a single not-for-profit facility, is estimating its corporate cost of capital. Its |
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tax-exempt debt currently requires an interest rate of 6.2 percent, and its target capital structure calls |
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for 60 percent debt financing and 40 percent equity (fund capital) financing. The estimated costs of |
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equity for selected investor-owned healthcare companies are given below: |
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Glaxo Wellcome |
15.0% |
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Beverly Enterprises |
16.4% |
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HEALTHSOUTH |
17.4% |
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Humana |
18.8% |
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a. What is the best estimate for Morningside’s cost of equity? |
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b. What is the firm’s corporate cost of capital? |
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ANSWER |