# HCM 301, textbook is Gapenski & Pink (2015), excel math problems

Please complete the four math problems below.

 9/1/14 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 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 15.0% Beverly Enterprises 16.4% HEALTHSOUTH 17.4% Humana 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