Description
Complete the Following Exercises on Each Excel Sheet:
Week 1 – TVM Exercise
Week 1 – Risk & Reward Exercise
Week 3 – Debt Financing Exercise
Week 3 – Equity Financing Exercise
Week 3 – Cost of Capital Exercise
Week 5 – Capital Budgeting Exercise
Week 5 Proj. Risk Analysis Exercise
Week 7 – Lease Financing Exercise
Week 9 – Working Capital
Week 11 – Course Summary Exercise
You may adjust the spacing on each sheet to show your work or add additional sheets to show your work for set of questions within each problem.
ALL calculations, and figures must be provided in your assignment, where applicable.
Unformatted Attachment Preview
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question in the problem.
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the A
Assigned Week(s).
PROBLEM 1: Week 1 and Week 2 -TVM Exercises
Find the following values for a lump sum:
– The future value of $400 invested at 7 percent for one year
`
– The future value of $400 invested at 7 percent for five years
– The present value of $400 to be received in one year when the opportunity cost rate is 7 percent
– The present value of $400 to be received in five years when the opportunity cost rate is 7 percent
assuming:
a. Annual compounding
b. Semiannual compounding
c. Quarterly compounding
PROBLEM 2: Week 1 and Week 2 -TVM Exercises
Consider the following investment cash flows:
Year
Cash Flow
0
-$1,100
1
$275
2
$325
3
$425
4
$575
5
$650
a. What is the return expected on this investment measured in dollar terms if the opportunity cost rate is 10%
b. Provide an explanation, in economic terms, of your answer.
c. What is the return on this investment measured in percentage terms?
d. Should this investment be made? Why?
in the problem.
Classroom by the Assigned Due Date for the
cost rate is 10%
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question in the problem.
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
Assigned Week(s).
PROBLEM 1: Week 1 and Week 2 Risk & Return Exercises
A few years ago, the Value Line Investment Survey reported the following market betas for the stocks of
selected healthcare providers:
Company
Beta
Tenet Healthcare
Beverly Enterprises
HCA Healthcare
United Health Group
0.80
1.10
1.35
1.60
At the time these betas were developed, reasonable estimates for the risk-free rate, RF, and the required
rate of return on the market, R(Rm), were 6.5 percent and 13.5 percent, respectively.
a. What are the required rates of return on the four stocks?
b. Why do their required rates of return differ?
c. Suppose that a person is planning to invest in only one stock rather than hold a well-diversified stock
portfolio. Are the required rates of return calculated above applicable to the investment? Explain your
answer.
PROBLEM 2: Week 1 and Week 2 Risk & Return Exercises
Assume that HCA is evaluating the feasibility of building a new hospital in an area not currently served
by the company. The company’s analysts estimate a market beta for the hospital project of 1.2, which is
somewhat higher than the 0.8 market beta of the company’s average project. Financial forecasts for the
new hospital indicate an expected rate of return on the investment of 20 percent. If the
risk-free rate, RF, is 7 percent and the required rate of return on the market, R(Rm), is 12 percent, is the
new hospital in the best interest of HCA’s shareholders? Explain your answer.
assignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for the
betas for the stocks of
e, RF, and the required
well-diversified stock
estment? Explain your
not currently served
project of 1.2, which is
ancial forecasts for the
m), is 12 percent, is the
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
Assigned Week(s).
PROBLEM 1: Week 3 and Week 4 Debt Financing
Assume HCA sold bonds that have a ten-year maturity, a 13 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 12 percent. What
would be the bond’s value?
b. Suppose that two years after the bonds were issued, the required interest rate rose to 14 percent. What
would be the bond’s value?
PROBLEM 2 : Week 3 and Week 4 Debt Financing
Tenet Healthcare, has a bond issue outstanding with eight years remaining to maturity,
a coupon rate of 9 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?
PROBLEM 3: Week 3 and Week 4 Debt Financing
United Health Group has bonds outstanding that have four years remaining to maturity,
a coupon interest rate of 8 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.
assignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for the
ell to 12 percent. What
ose to 14 percent. What
The current market
d to maturity in this
rcent rate of return on
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
the Assigned Week(s).
PROBLEM 1: Week 3 and Week 4 Equity Financing
Liberty Rehab Corporation has a current stock price of $56, and its last dividend (D0) was
$5.00. In view of the company’s strong financial position, its required rate of return is 10 percent. If Liberty’s
dividends are expected to grow at a constant rate in the future, what is the firm’s expected stock price in
five years?
Constant Growth Rate:
Expected Stock Price in 5 Years:
PROBLEM 2: Week 3 and Week 4 Equity Financing
Your personal financial advisor is trying to get you to buy the stock of Eagle Healthcare, a
local drug and alcohol rehabilitation company. The stock has a current market price of $35, its last dividend (D0) wa
and the company’s earnings and dividends are expected to increase at a constant growth rate of 8 percent. The
required return on this stock is 15 percent. From a strict valuation standpoint, should you buy the
stock?
Include the solution for deciding to buy or not buy the stock.
assignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for
is 10 percent. If Liberty’s
expected stock price in
ce of $35, its last dividend (D0) was $2.50,
growth rate of 8 percent. The
uld you buy the
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
Assigned Week(s).
PROBLEM 1: Week 3 and Week 4 Cost of Capital
St. David’s Hospital in Austin, Texas has a target capital structure of 35 percent debt and 65 percent equity. Its cost
equity (fund capital) estimate is 13.5 percent and its cost of debt is 7 percent. If it has a 35% tax rate, what
is the hospital’s corporate cost of capital?
PROBLEM 2: Week 3 and Week 4 Cost of Capital
The capital structure for HCA is provided below. If the firm has a 5% after tax cost of debt, 9% commerical loan rate
a 11.5% cost of preferred stock, an 15% cost of common stock, and given the dollar amounts provided below, what
weighted average cost of capital (WACC)?
Capital Structure (in K’s)
Bonds
$ 1,083
Commercial Loans
$ 2,845
Preferred Stock
$
268
Common Stock
$ 3,681
Weights
Individual Costs
5.00%
9.00%
11.50%
15.00%
assignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for the
ebt and 65 percent equity. Its cost of
has a 35% tax rate, what
t of debt, 9% commerical loan rate,
lar amounts provided below, what is the firm’s
Weighted Costs
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question in the problem.
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
PROBLEM 1: Week 5 and Week 6 Capital Budgeting
Assume that you are the CFO at Methodist Hospital in San Antonio. The CEO has asked you to
analyze two proposed capital investments: Project X and Project Y. Each project requires a net
investment outlay of $10,000, and the cost of capital for each project is 12 percent. The project’s expected
net cash flows are as follows:
Year
0
1
2
3
4
Project X Project Y
-$11,000
-$11,000
$7,000
$3,000
$3,000
$3,000
$3,000
$4,000
$1,000
$4,000
a. Calculate each project’s payback period, net present value (NPV), and internal rate of return (IRR).
b. Which project (or projects) is financially acceptable? Explain your answer.
a. Complete the table below, solving for the project’s cash flows, paybacks, NPVs (at 12 percent), and IRRs.
Year
Project X
Annual
Cash Flow
Project X
Cumulative
Cash Flow
Project Y
Annual
Cash Flow
0
1
2
3
4
Payback
NPV
IRR
b. Which project (or projects) is financially acceptable? Explain your answer.
Project Y
Cumulative
Cash Flow
PROBLEM 2: Week 5 and Week 6 Capital Budgeting
HCA is evaluating the bulk purchase of new Hill-Rom hospital beds for its Central & West Texas region. The purcha
beds have an expected life of five years. The expected pretax salvage value after five years of use is $4,000,000. In
generate $9,000,000 in revenue in the first year of operations.
Maintenance costs are expected to be $200,000 during the first year of operation, while the increase in utilities will c
the system in Year 1. The cost for additional expendable supplies is expected to average $250,000 during the first y
except depreciation, are expected to increase at a 2.8% inflation rate after the first year. The hospital’s aggregae tax
corporate cost of capital is 8.4%.
The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following deprec
Year
1
2
3
4
5
6
Allowance
20%
32%
19%
12%
11%
6%
a. Estimate the project’s net cash flows over its five-year estimated life.
b. What are the project’s NPV and IRR? (Assume that the project has average risk.)
c. Based on the results of the analysis, should this project be approved?
a. Complete the table below, solving for the project’s net cash flows over its five-year estimated life.
Equipment cost
Net revenues
Less:
Maintenance costs
Utilities costs
Supplies
Depreciation
Operating income
Taxes
Net operating income
Depreciation
Plus: After-tax equipment salvage value*
Net cash flow
0
-$36,000,000
1
-$36,000,000
b. What are the project’s NPV and IRR? (Assume that the project has average risk.)
2
c. Based on the results of the analysis, should this project be approved?
in the problem.
he Classroom by the Assigned Due Date for the Assigned Week(s).
oject’s expected
ercent), and IRRs.
Texas region. The purchase will cost $36,000,000 and the
rs of use is $4,000,000. In total, the beds are expected to
e increase in utilities will cost another $100,000 across
$250,000 during the first year. All costs and revenues,
he hospital’s aggregae tax rate is 21.15%, and its
ect to the following depreciation allowances:
3
4
5
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question in the problem.
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
Assigned Week(s).
PROBLEM 1: Proj Risk Analysis
Parallon Business Solutions, a division of HCA that provides revenue cycle functions, is evaluating two different
computer systems for handling provider claims. There are no incremental revenues attached to the projects,
so the decision will be made on the basis of the present value of costs. Parallon’s corporate cost of capital is 10 per
Here are the net cash flow estimates in thousands of dollars:
Year
0
1
2
3
System X
-$1,300
$825
$825
$825
System Y
-$1,100
$750
$750
$750
a. Assume initially that the systems both have average risk. Which one should be chosen?
b. Assume that System Y is judged to have high risk. Parallon accounts for differential risk by adjusting its
corporate cost of capital up or down by 2 percentage points. Which system should be chosen?
PROBLEM 2: Proj Risk Analysis
Xenex Inc., a supplier of hospital room disinfection systems, has a cost of capital of 12 percent.
To fairly evaluate projects and adjust for risk, it adds or subtracts 2 percentage points to the discount rate.
Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and will last four ye
Neither project is projected to generate positive cash flows and thus both are evaluated on the basis of costs.
However, Project A is judged to be a riskier-than-average project but Project B is determined to a lower than averag
In which project should Xenex invest its capital?
signment.
question in the problem.
k to the Classroom by the Assigned Due Date for the
s, is evaluating two different
attached to the projects,
orporate cost of capital is 10 percent.
ial risk by adjusting its
d be chosen?
12 percent.
ts to the discount rate.
t of $200,000 and will last four years.
ated on the basis of costs.
etermined to a lower than average risk investment.
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
Assigned Week(s).
PROBLEM 1: Week 7 and Week 8 Lease Financing
A HCA hospital in Colorado plans to obtain a new MRI that costs $1.5 million and has
an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI,
or it can obtain a guideline lease for the equipment. Assume that the following facts apply to the decision:
– The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45,
0.15, and 0.07 in Years 1 through 4, respectively.
– Estimated maintenance expenses are $75,000 payable at the beginning of each year whether the MRI is
leased or purchased.
– HCA’s marginal tax rate is 40 percent.
– The bank loan would have an interest rate of 15 percent.
– If leased, the lease payments would be $400,000 payable at the end of each of the next four years.
– The estimated residual (and salvage) value is $250,000.
What are the NAL and IRR of the lease? Should the organization buy or lease the equipment?
ssignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for the
and buy the MRI,
ts apply to the decision:
ances are 0.33, 0.45,
year whether the MRI is
he next four years.
equipment?
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
Assigned Week(s).
PROBLEM 1: Week 9 and Week 10 Working Cap Mgmt
Brooke Army Medical Center dispenses 275,000 bottles of brand name pharmaceutical annually.
The optimal safety stock (which is on hand initially) is 1,000 bottles. Each bottle costs the center $12,
inventory carrying costs are 25 percent, and the cost of placing an order with its supplier is $175.
a. What is the economic order quantity?
b. What is the maximum inventory for this medication?
c. How often must the center order (in days)?
PROBLEM 2: Week 9 and Week 10 Working Cap Mgmt
Northeast Baptist buys $400,000 of a particular item (at gross prices) from its major supplier,
Cardinal Health, which offers NE Baptist terms of 2/10, net 30. Currently, the hospital is paying the
supplier the full amount due on Day 30, but it is considering taking the discount, paying on Day 10 and
replacing the trade credit with a bank loan that has a 12 percent rate.
a. What is the amount of free trade credit that Baptist obtains from Cardinal Health? (Assume
360 days per year throughout this problem.)
b. What is the amount of costly trade credit?
c. What is the approximate annual cost of the costly trade credit?
d. Should Baptist replace its trade credit with the bank loan? Explain your answer.
e. If the bank loan is used, how much of the trade credit should be replaced?
assignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for the
utical annually.
osts the center $12,
upplier is $175.
pital is paying the
aying on Day 10 and
h? (Assume
Purchase answer to see full
attachment
