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1. Sun coast Healthcare is planning to acquire a new x-ray machine that costs $200,000. The business can either lease the machine using an operating lease or buy it using a loan from a lock bank. Sun coast’s balance sheet prior to acquiring the machine is a follows:
Current assets $100,000 debt $400,000
Net fixed assets 900,000 Equity 600,000
Total assets $1,000,000 Total Claims $1,000,000
a) What is Suns coast’s current debt ratio?
b) What would the new debt ratio be if the machine were leased? If is purchased?
c) Is the financial risk of the business different under the two acquisition alternatives?
2. Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can lease the equipment. Assume that the following facts apply to the decision:
· The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33,0.45,0.15 and 0.7 in years 1 through 4, respectively
· Estimated maintenance expenses are $75,000 payable at the beginning of each year whether the MRI is leased or purchased.
· Big sky’s marginal tax rate is 40 percent
· The bank loan would have an interest rate of 15 percent
· If the lease (rental) payments would be $400,000 payable at the end of each of the next four years
· The estimated residual (and salvage) value is $250,000
a) What are the NAL and IRR of the lease? Interpret each value.
b) Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What is the new NAL? The new IRR?
3. Health Plan Northwest must install a new $1 million computer to track patient records in its three service areas. It plans to use the computer for only three years at which time a brand new system will be acquired that will handle both billing and patient’s records. The company can obtain a 10 percent bank loan to buy the computer, or it can lease the computer for three years. Assume that the following facts apply to the decision
· The computer falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15 and 0.07 in years 1 through 4 respectively.
· The company’s marginal tax rate is 34 percent
· Tentative lease terms call for payments of $320,000 at the end of each year
· The best estimate for the value of the computer after three years of wear and tear is $200,000
a) What are the NAL and IRR of the lease? Interpret each value .
b) Assume now that the bank loan would cost 15 percent, but all other facts remain the same. What is the new NAL? The new IRR?
4. Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profits and loss statements and equity reinvestment (asset) requirement are as follows (in millions):
2012 2013 2014 2015 2016
Net revenues $225.0 $240.0 $250.0 $260.0 $275.0
Cash expense 200.0 205.0 210.0 215.0 225.0
Depreciation 11.0 12.0 13.0 14.0 15.0
Earnings before interest and taxes (EBIT) $14.0 23.0 27.0 31.0 35.0
Interest 8.0 9.0 9.0 10.0 10.0
Earnings before taxes (EBT) $6.0 14.0 18.0 21.0 25.0
Taxes (40 percent) 2.4 5.6 7.2 8.4 10.0
Net profit $3.6 8.4 10.8 12.6 15.0
Asset requirements $6.0 6.0 6.0 6.0 6.0
Briarwood cost of equity is 16 percent. The best estimate for Briarwood long term growth rate is 4 percent
a) What is the equity value of the hospital?
b) Suppose that the expected long term growth rate was 6 percent. What impact would this change have on the equity value of the business? What if the growth rate were only 2 percent?
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