HCAD 645 UMGC Pacific Healthcare Bond Valuation Analysis Memorandum

Read Case #13 (pages 89-90) from Gapenski’s Cases in Healthcare Finance – “Pacific Healthcare (A)”. Review the case, utilize the case model provided by the publisher, and respond to the following questions:

To prepare for the meeting, create a summary of the yields of each bond by completing the table shown in Exhibit 14.2. Remember that the YTM of each bond is assumed to be the required rate of return of each bond and that the semiannual YTM must be multiplied by two to get the stated (nominal) YTM.

The Chair comments that the 15-year and both 25-year bonds are callable five years from today at $1,050 and asks you for the yield-to-call on each of the three bonds.

Finally, the Chair states that most bond market analysts believe that interest rates will remain at the 10 percent level for the next several years. She asks you whether Pacific should consider calling any of its bonds and why. (Hint: No additional calculations are required.)

Prepare your response in MEMO FORMAT, suitable for presentation to a senior level executive.

Copyright 2018. Health Administration Press.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
C AS E
PAC I F I C H E A LT H C A R E (A )
BOND VALUATION
13
Pacific Healthcare is an investor-owned hospital chain that owns and
operates nine hospitals in Washington, Oregon, and Northern California.
Marcia Long, a recent graduate of a prominent health administration program,
has just been hired by Washington Medical Center, Pacific’s largest hospital.
Like all new management personnel, Marcia must undergo three months
of intensive indoctrination at the system level before joining the hospital.
Marcia began her indoctrination in January 2018. Her first assignment
at Pacific was to review its latest annual report. This was a stroke of luck
for Marcia because her father owned several bonds issued by Pacific, and
she was especially interested in whether her father had made a good investment. To glean more information about the bonds, she examined Note E
to Pacific’s consolidated financial statements, which lists the company’s
long-term debt obligations, including its first mortgage bonds, installment
contracts, and term loans. Exhibit 13.1 contains information on four of the
first-mortgage bonds listed in Pacific’s annual report. All four bonds pay
interest semiannually. (For more information on bond ratings, see Standard
& Poor’s website at www.standardandpoors.com or the Moody’s Investors
Service website at www.moodys.com.)
Pacific’s chief financial officer, Hugo Welsh, found out about Marcia’s
interest in the firm’s debt financing. “Because you are so interested in our
financial structure,” he said, “I want you to do the bond valuation and make
a presentation to our executive committee.” Hugo then asked Marcia to
perform the calculations required to complete exhibit 13.2 and to think
about some of the questions that members of the committee might ask her
about the numbers.
© Fou nd at ion of ACHE, 2018. Repr oduc t i o n w i t h o u t p e r mi s s i o n i s p r o h i b i t e d .
EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 6/6/2023 11:12 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS
AN: 1792719 ; George Pink.; Gapenski’s Cases in Healthcare Finance, Sixth Edition
Account: s4264928.main.eds
89
90
EXHIBIT 13.1
Pacific Healthcare:
Long-Term Bonds
EXHIBIT 13.2
Pacific Healthcare:
Long-Term Bond Stated
(Nominal) Yields
C ase s in Health care F in a n c e
Face
Current
Par
Coupon
Maturity
Years to
Bond
Amount
Price
Value
Rate
Date
Maturity
Rating
$ 48,000,000
$  800.00
$1,000
4.50%
12/31/2018  5
A+
$ 32,000,000
$  865.49
$1,000
8.25%
12/31/2028
15
A+
$100,000,000
$1,220.00
$1,000
12.625%
12/31/2038
25
A+
$ 64,000,000
$  747.48
$1,000
7.375%
12/31/2038
25
A+
Annual
2018
2018
1/1/2019
2018
2018
Face
Yield to
Coupon
Current
Expected
Capital Gain
Total
Amount
Maturity
Payments
Yield
Price
Yield
Yield
$ 48,000,000
$ 32,000,000
$100,000,000
$ 64,000,000
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