Assignment

The avenues available for for-profit healthcare providers to increase their equity position would be to increase the operation and non-operation incomes, issue stock, and to create partnerships. For non-profit health care providers, internally generated funds, philanthropy, and government grants would be the best ways to increases their equity.

The advantages for a taxpaying entity in issuing debt as opposed to equity is that debt does not dilute ownership interest, it is better for short-term financing, interest on debt can be deducted for tax purposes(Coplan, 2009). Other advantages are that there is less complication when there are funds raised through debt there are fewer laws and regulations that must be complied. There are future obligations of principle and interest payments. The disadvantages are companies with high debt see that it is difficult to serve the cost of debt. Debt has a fixed obligation that must be paid at some point, there are greater restrictions on a company regarding debt financing through alternate sources, companies with high debt and equity ratio are riskier, and interest repayment is a fixed obligation which must be paid even if the company does not earn adequate profits(Coplan, 2009).

Subordinated debentures are unsecured bonds that make them minor to all present and future debt in the event of default, liquidation, reorganization, and bankruptcy. It is debt that is ranked after all other debts, has a lower priority than other bonds, is repayable after other debts have been paid, are riskier compared to other types of debts, have a higher rate of return, and have a lower credit rating than senior bonds. Debenture is an unsecured loan certificate issued by a company and backed by a general credit rather than by specified assets. It is a medium to long-term debt format used by large companies to borrow money at a fixed-rate.

1. Why would an investment banker syndicate a bond issue with other investment bankers?

2. If a $1,000 zero coupon bond with a 20-year maturity has a market price of $311.80, what is its rate of return?

3. A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $1,000.

4. If a required market rates are 8 percent, what is the market price of the bond?

5. If required market rates fall to 5 percent, what is the market price of the bond?

6. Charles City Hospital plans on issuing a tax-exempt bond at the bond is $1,000.

7. If required market rates are 6 percent, what is the value of the bond?

8. If required market rates fall to 12 percent what is the value of the bond?

9. At what required market rate (3,6, or 12 percent) does the above bond sell at a discount? At a premium?

10. Mercy Medical Mega Center , a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $400,000 and will be depreciated on straight-line basis over five years to a zero salvage value. Mercy Medical could borrow the full amount at a 15 percent rate for five years. The after-tax cost of debt equals 9 percent. Alternatively, it could lease the device for five years. The before-tax lease payments per year would be $80,000. The tax rate for this MegaCenter is 40 percent. From a financial perspective, should Mercy lease the surgical device or borrow the money to purchase it and why?

References

Coplan, J. (2009). Raising Capital: Equity vs. Debt.

The Break-Even Equation and Profit Calculation

Submit written responses to these questions.

1. What are the formulas for:

- The basis break-even equation

- The basis breakeven equation expanded to include indirect costs and desired profit?

2. Explain the relationship between step-five costs and the relevant range.

3. Based on the product margin, when is it in the best interests of an organization to continue or drop a service?

4. Laurie Vaden is a nurse practitioner with her own practice. She has developed contracts with several large employers to perform routine physical, fitness for duty exams, and initial screening of on-the-job injuries. She currently sees 150 per month, charging 450 per visit. Her total costs are $7,500, of which $1,500 is for supplies. She has decided that she needs to increase profit, so she is considering raising her fee to $65. She expects to lose 10 percent of her business to competitors that charge an average of 460 per visit. Determine her current and predicted: 1) revenues, 2) variable costs, and 3) total contribution margin. What do you recommend she do? Why?

5. Janet Gilbert is director of labs. She has some extra capacity and has contracted with some small neighboring hospitals to run some of their lab tests. She has recently had a study conducted and has determined that her costs of these contracts are $10,000 of which $7,000 are for supplies and items related to each test. She currently charges an average of $10,00 per lab test. She is thinking of lowering her price by 20 percent in hopes of raising her current volume of 10,000 tests by 15 percent. Determine her current and predicted: 1) revenues, 2) variable costs, 3) total contribution margin, and 4) net income. What do you recommend she do? Why?

6. Shady Rest Nursing Home has 100 private pay residents. The administrator is concerned about balancing the ratio its private pay to non-private pay patients. Non-private pay sources reimburse an average of $100 per day whereas private pay residents pay average 100 percent of full daily charges. The administrator estimates that variable cost per resident per day is $25 for supplies, food, and contracted services and annual fixed costs are $4,562,500. - What is the daily contribution margin of each non-private pay resident?

- If 25 percent of the residents are non-private pay, what will shady Rest charge the private pay patients in order to break even?
- What if non-private pay payors cover 50 percent of the residents?

7. The owner of Shady Rest Nursing Home insists that the facility earn $80,000 in annual profits. How much must the administrator raise the per day charge for the privately insured residents if 25 percent of the residents are covered by non-private pay payors?