Problem 1
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
Problem 3
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 cu
ent 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
Problem 5
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 cu
ent market price is $829?
b. If the cu
ent 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
Problem 5 Ch. 9
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 cu
ently 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