| Assume Venture Healthcare sold bonds that have a ten-year maturity, a 12 percent coupon rate withannual 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. Whatwould be the bond’s value?b. Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. Whatwould be the bond’s value?c. What would be the value of the bonds three years after issue in each scenario above, assuming thatinterest rates stayed steady at either 7 percent or 13 percent?ANSWERUNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENTChapter 5 — Debt FinancingChapter 7 — Securities Valuation, Market Efficiency, and Debt RefundingPROBLEM 2Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four yearsremaining until maturity. The par value of the bond is $1,000, and the bond pays interest annually.a. Determine the current value of the bond if present market conditions justify a 14 percent required rateof return.b. Now, suppose Twin Oaks’ four-year bond had semiannual coupon payments. What would be its currentvalue? (Assume a 7 percent semiannual required rate of return. However, the actual rate would beslightly less than 7 percent because a semiannual bond is slightly less risky than an annual couponbond.)c. Assume that Twin Oaks’ bond had a semiannual coupon but 20 years remaining to maturity. What isthe current value under these conditions? (Again, assume a 7 percent semiannual required rate ofreturn, although the actual rate would probably be greater than 7 percent because of increased pricerisk.)ANSWERUNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENTChapter 6 — Equity Financing and Investment BankingChapter 7 — Securities Valuation, Market Efficiency, and Debt RefundingPROBLEM2Medical Corporation of America (MCA) has a current stock price of $36, and its last dividend (D0) was$2.40. In view of MCA’s strong financial position, its required rate of return is 12 percent. If MCA’sdividends are expected to grow at a constant rate in the future, what is the firm’s expected stock price infive years? |
