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

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