Solve Problem 3 in the attached file. Please show all work.
>Problem
1Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent. What
Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. What
would be the bond’s value?
What would be the value of the bonds three years after issue in each scenario above, assuming that
a. b. Bond Value c.1
2| UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT | 5/1/10 | |||||||||||||||||||||||||||
| Chapter 5 — Debt Financing | ||||||||||||||||||||||||||||
| Chapter 7 — Securities Valuation, Market Efficiency, and Debt Refunding | ||||||||||||||||||||||||||||
| 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. | ||||||||||||||||||||||||||||
| would be the bond’s value? | ||||||||||||||||||||||||||||
| b. | ||||||||||||||||||||||||||||
| c. | ||||||||||||||||||||||||||||
| interest rates stayed steady at either 7 percent or 13 percent? | ||||||||||||||||||||||||||||
| ANSWER | ||||||||||||||||||||||||||||
| Bond Value | $1,299 | |||||||||||||||||||||||||||
| $952 | ||||||||||||||||||||||||||||
| 3 year value | $1,269 | |||||||||||||||||||||||||||
| $956 |
Chapter 5 — Debt Financing
Chapter 7 — Securities Valuation, Market Efficiency, and Debt Refunding
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? |
Chapter 7 — Securities Valuation, Market Efficiency, and Debt Refunding
ANSWER
| Chapter 6 — Equity Financing and Investment Banking | |
| PROBLEM 2 | |
| Medical 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’s | |
| dividends are expected to grow at a constant rate in the future, what is the firm’s expected stock price in | |
| five years? |
Chapter 6 — Equity Financing and Investment Banking
Chapter 7 — Securities Valuation, Market Efficiency, and Debt Refunding
ANSWER
| PROBLEM 5 |
| Better Life Nursing Home, Inc. has maintained a dividend payment of $4 per share for many years. The |
| same dollar dividend is expected to be paid in future years. If investors require a 12 percent rate of |
| return on investments of similar risk, determine the value of the company’s stock. |
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