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1. Finance Healthcare HW
Finance Healthcare HW ON Finance Healthcare HWPlease
attachment.chapter_6_problems_1__3__5___6.xlschapter_9_problems_2__3Unformatted
Attachment Preview9/1/2014 UNDERSTANDING HEALTHCARE FINANCIAL
MANAGEMENT Chapter 6 — Debt Financing 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? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6
— Debt Financing PROBLEM 3 Tidewater Home Health Care, Inc., has a bond issue
outstanding with eight years remaining to maturity, a coupon rate of 10 percent with
interest paid annually, and a par value of $1,000. The current market price of the bond is
$1,251.22. a. What is the bond’s yield to maturity? b. Now, assume that the bond has
semiannual coupon payments. What is its yield to maturity in this situation? ANSWER
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 — Debt Financing
PROBLEM 5 Minneapolis Health System has bonds outstanding that have four years
remaining to maturity, a coupon interest rate of 9 percent paid annually, and a $1,000 par
value. a. What is the yield to maturity on the issue if the current market price is $829? b. If
the current market price is $1,104? c. Would you be willing to buy one of these bonds for
$829 if you required a 12 percent rate of return on the issue? Explain your answer.
ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 6 — Debt
Financing PROBLEM 6 Six years ago, Bradford Community Hospital issued 20-year
municipal bonds with a 7 percent annual coupon rate. Finance Healthcare HWThe bonds
were called today for a $70 call premium–that is, bondholders received $1,070 for each
bond. What is the realized rate of return for those investors who bought the bonds for
$1,000 when they were issued? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL
MANAGEMENT Chapter 9 — Cost of Capital PROBLEM 2 St. Vincent’s Hospital has a target
capital structure of 35 percent debt and 65 percent equity. Its cost of equity (fund capital)
estimate is 13.5 percent and its cost of tax-exempt debt estimate is 7 percent. What is the
hospital’s corporate cost of capital? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL
MANAGEMENT Chapter 9 — Cost of Capital PROBLEM 3 Richmond Clinic has obtained the

2. following estimates for its costs of debt and equity at various capital structures: Percent
Debt 0% 20% 40% 60% 80% After-Tax Cost of Debt 6,6% 7,8% 10,2% 14,0% Cost of Equity
16% 17% 19% 22% 27% What is the firm’s optimal capital structure? (Hint: Calculate its
corporate cost of capital at each structure. Also, note that data on component costs at
alternative capital structures are not reliable in real-world situations.) ANSWER
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 9 — Cost of Capital
PROBLEM 5 Morningside Nursing Home, a single not-for-profit facility, is estimating its
corporate cost of capital. Its tax-exempt debt currently requires an interest rate of 6.2
percent, and its target capital structure calls for 60 percent debt financing and 40 percent
equity (fund capital) financing. The estimated costs of equity for selected investor-owned
healthcare companies are given below: Glaxo Wellcome Beverly Enterprises
HEALTHSOUTH Humana 15,0% 16,4% 17,4% 18,8% a. What is the best estimate for
Morningside’s cost of equity? b. What is the firm’s corporate cost of capital? ANSWER