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
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
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
PROBLEM 6
Six years ago, Bradford Community Hospital issued 20-year municipal bonds with a 7 percent annual coupon rate. The 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
Chapter 9
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
PROBLEM 3
Richmond Clinic has obtained the following estimates for its costs of debt and equity at various capital
structures:
After-Tax
Percent Cost of Cost of
Debt Debt Equity
0% 16%
20% 6.6% 17%
40% 7.8% 19%
60% 10.2% 22%
80% 14.0% 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
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?
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