Solve Problem 3 in the attached file. Please show all work.
>Problem Suppose 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
1 Chapter 5 — Debt Financing ANSWER Chapter 7 — Securities Valuation, Market Efficiency, and Debt Refunding ANSWER Chapter 6 — Equity Financing and Investment Banking ANSWER1
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
a.
Bond Value
$1,299
b. Bond Value
$952
c.
3 year value
$1,269
2
$956
Problem 3
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 7 — Securities Valuation, Market Efficiency, and Debt Refunding
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?
Problem 2
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
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?
Problem 5
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 7 — Securities Valuation, Market Efficiency, and Debt Refunding
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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