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1. Oakdale Community Hospital is considering building an ambulatory surgery center. Which of the following opportunity cost rates would be most appropriate for discounting the project’s future cash flows?
 
a. The expected rate of return on a bank CD
b. The expected rate of return on a municipal bond
c. The expected rate of return on the stock of SurgiCare Corporation, a for-profit company that operates a large number of freestanding ambulatory surgery centers
d. The expected rate of return on the stock of Skilled Healthcare Group, a for-profit company that operates a large number of nursing homes and assisted living centers
e. The expected rate of return on Medcath Corporation, a for-profit company that operates a large number of cardiac specialty hospitals
 
2. Assume that an outstanding seven-year bond has $1,000 par value, a coupon rate of 10 percent, and five years remaining to maturity. If the required rate of return on similar bonds of equal risk is 5 percent, the bond will sell at which of the following?
 
a. A premium
b. A discount
c. At par value
d. At $500 ($100 annual interest payments x 5 years to maturity)
e. The bond cannot be sold again because it is already outstanding.

 
11. Acme Delivery Systems (ADS) is an integrated healthcare delivery system. Currently ADS contracts with the community to provide MRI scans and they are looking at bringing the service in house. They expect to provide 2000 scans next year with an annual increase of 10% per annum. Currently they have a contract with an outside provider which will cost $700 per scan next year (Year 1) and the price will increase at 5% per annum (MRIs in year 2 under contract cost 5% more than year 1 and so forth).
 
Alternatively ADS can purchase an MRI at a total installed cost of $4,000,000. The MRI has a useful life of 10 years and is depreciated on a straight-line basis. You have been asked to do an analysis of whether ADS, a for profit company, should purchase the MRI or continue contracting out to the community. Doing research into the project you have used the following information:
 
a) The balance sheet – see attachment
b) The template for projected P&L of the MRI – see attachment
 
c) ADS just paid a dividend of $2.00 per share and it is expected to grow at 5% per annum.
d) The Risk Free Rate is 6%
 
e) The Market Risk Premium is 6%
f) ADS beta is 1.6
 
g) The MRI’s Beta in relation to ADS overall portfolio of projects is .8 as it is less risky than the average risk of the portfolio of projects
h) ADS current tax rate is 30%
 
i) They issued senior debt 20 Year debt 5 Year ago at a coupon rate of 7%
j) The current market required rate for debt of similar risk and time to maturity is 5%
 
11.1. What is the expected rate of return for equity holders?
11.2. What is the current price of an ADS share of stock?
 
11.3. What is the current price of ADS bonds?
11.4. What is the Weighted Average Cost of Capital for ADS?
 
11.5. Should ADS buy the MRI or contract for it in the community?
11.6. Which of the options is riskier
 
a. Should this be taken into account when evaluating the two options
b. Presuming your answer is yes (which is not necessarily the correct answer) how would you account for it in this case where you are comparing two cost streams?
 
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11.7. At what discount rate would ADS be financially indifferent between the two options?

 
12. Dr Maya founded a radiology benefit management company that controls diagnostic imaging costs by influencing physicians to follow evidenced based prescribing guidelines.Dr Maya invested $2mm on 1/1/13 to start the company. By 1/1/14 the company was generating run-rate profits of $2mm per year, and Dr Maya was invested everything back into the business.During 2014, Dr Maya decides she should raise $10mm to expand her business. She explores debt and equity financing, and as part of that exploration process she compiles the following 4-yr projections
 
• Upside scenario: Sell for $90mm.
• Base Case scenario: Sell for $60mm.
• Downside Scenario: Sell for $5mm.
 

Assume the outside investment is made on 1/1/15, and the eventual sale of the company occurs on 1/1/19 (4 yrs after the outside investment). She receives the following term sheet proposals
 
• Proposal #1: Equity investment from HLR Capital. $10mm investment for 25% ownership.
• Proposal #2: Term loan. $10mm investment, 8% interest rate, 4 year term.(Assume the debt is a zero-coupon loan that pays back all interest and principal at maturity. Assume interest is compounded annually.)
 

a. What is the future value (at maturity) of the debt
b. Calculate the cost of financing for each of the proposals, in each of the 3 scenarios
 
Cost of financing: Debt Equity
Upside scenario
Base Case scenario
Downside scenario
 

c. Calculate the payout for Dr. Maya for each proposal in each of the 3 scenarios
Payout for Dr Maya Debt Equity
Upside scenario
Base Case scenario
Downside scenario

 

d. Calculate Dr. Maya’s IRR on her initial investment for each scenario
IRR for Dr Maya Debt Equity
Upside scenario
Base Case scenario
Downside scenario
 
e. If you were Dr Maya, which proposal would you choose and why?

 
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