Finance-AW-Q353

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PART II – Problems

 

Q1. The following data represents the budgets of the Brandon Surgery center (in thousands of dollars)
 

  Simple Flexible Actual
Number of Surgeries 1,500 ? 1,400
Patient Revenue 6,000 ? 5,400
Salary Expense 4,500 ? 4,500
Non Salary Expense 750 ? 800
Profit 750 ? 100

 
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Assume that all revenue and costs are variable and therefore tied directly to patient volume
 

  1. Construct and explain how each amount in the flexible budget is calculated.
  2. Determine the profit, revenue and cost variances.
  3. Break down the cost variance into volume and management components
  4. What do the results tell the managers of the center about the operations for the period of time?

 
Q2. Consider a loan of $10,000,000 taken out for 8 years, annual payment terms at a 10% rate.  Construct the amortization schedule for the loan if the first payment is due a year from the date of the loan.
 
Q3. ABC Health Plan currently uses a zero –debt financing. Its operating EBIT is $2,000,000 and its tax rate is 40%. It currently has $4 million in assets financed entirely by equity. The organization is considering changing its capital structure by replacing half of its equity financing with debt financing that will bear an interest rate of 10%.
 

  1. What is the impact of the new capital structure on the following: Net income, total dollar return to investors and ROE?

    2.  

  2. Repeat the same analysis but assume that ABC is a not-for-profit organization. Now what is the impact of the change in capital structure?( Show both capital structure calculations)

 
Q4. ABC health is evaluating two investment projects each having an initial cash outlay of $2 million. The cash flows projected for the project are as follow

 

Year Project I   Project II
1 1,500,000   500,000
2 500,000   500,000
3 500,000   500,000
4 500,000   500,000
5 500,000   2,000,000

 

  1. What is each project’s IRR?
  2. Calculate each project’s NPV is the cost of capital is 10% and. 15%?
  3. Which of the project should be chosen and why?

 
Q5. ABC Surgical Supplies, sells on the terms of 2/10, net 30. The gross sales are $1,500,000. 20%  of customers take advantage of the discount and pay on the tenth day , 40% pay on the 30th day and the remaining pay on the average 40 days after the purchase. (use number of days in a year as 360).

     

  1. What is the firm’s average collection period?
  2. What is the firm’s current receivable balance?
  3. What is the firms’ new receivable balance if the firm tightens its collection policy and all non-discount customers paid on the 30Th day?
  4. If the firm’s cost of carrying receivables is 10%, how much will the firms save with the new collection policy?

 
Q6. ABC memorial has estimated the following cash flow for a service line operations
 

Year 1   Estimated Cash flow
0   -100,000
1   30,000
2   30,000
3   30,000
4   30,000
5   30,000
5 (terminal value)   20,000

 

The cost of capital is 10%. Risk premium is calculated at 3%.
 

  1. What is the project’s IRR?
  2. Assume average risk what is the NPV? At high risk and at low risk?

 
Q7. ABC Clinic has the following data for its equity and debt at various capital structure, the tax rate is 40%
 

Percent Debt Cost of Debt Cost of Equity
0 0 15%
20% 11% 16%
40% 13% 18%
60% 17% 20%
80% 23.3% 22%

 

  1. What is the firm’s optimal capital structure? And why?

 
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