Reference no: EM13490636
1 Seattle Health Plans currently uses zero-debt financing. Its operating income (EBIT) is 1 million, and it pays taxes at a 40 percent rate. It has $5 million in assets and, because it is all equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 percent.
a. What impact would the new capital structure have on the firm's net income, total dollar return to investors, and ROE?
b. Redo the analysis, but now assume that the debt financing would cost 15 percent.
c. Return to the initial 8 percent interest rate. Now, assume that EBIT could be as low as $500,000 (with a probability of 20 percent) or as high as $1.5 million (with a probability of 20 percent). There remains a 60 percent chance that EBIT would be $1 million. Redo the analysis for each level of EBIT, and find the expected values for the firm's income, total dollar return to investors, ROE. What lesson about capital structure and risk does this illustration provide?
d. Repeat the analysis required for Part a, but now assume that Seattle Health Plans is a not-for-profit corporation and pays no taxes. Compare the results with those obtained in Part a.
2 Calculate the after-tax cost of debt for the Wallace clinic, a for-profit healthcare provider, assuming that the coupon rate set on its debt is 11 percent and its tax rate is:
a. 0 percent
b. 20 percent
c. 40 percent
3 St. Vincent's Hospital has a target capital structure of 35 percent debt and 65 percent equity. Its cost of equity (fund capital) estimate is
5 percent and its cost of tax-exempt debt estimate is 7 percent. What is the hospital's corporate cost of capital?
4 Richmond Clinic has obtained the following estimates for its costs of debt and equity at various capital structures:
Percent Debt After-Tax Cost of Debt Cost of Equity
0% _ 16%
20 6.6% 17
40 7.8 19
60 10.2 22
80 14.0 27
What is the firm's optimal capital structure? (Hint: Calculate its corporate cost of capital at each structure. Also, note that data on component costs at alternative capital structures are not reliable in real-world situations.)
|
Find the force on the test charge
: a test charge of +3x10-7 C is located 5cm to the right of a charge of -4x10-6 C and 10 cm to the left of a charge of -1x10-6 C.the three charges lie on a straight line. find the force on the test charge
|
|
Financial statements for bernard company
: Financial statements for Bernard Company to calculate the Working capital, Current ratio and Quick ratio
|
|
Find the magnitude of magnetic field at the center of loop
: a segment of wire of total length 2m is formed into a circular loop having 5 turns if the wire carries a 1.2A current determined the magnitude of the magnetic field at the center of the loop
|
|
What is the strain in the column
: A reinforced concrete column 400mm by 400mm and 3.5m high is subjected to a load 160kN. The column shortens by 0.07mm. What is the strain in the column
|
|
What impact would the new capital structure
: What impact would the new capital structure have on the firm's net income, total dollar return to investors, and ROE and redo the analysis, but now assume that the debt financing would cost 15 percent.
|
|
What is the force in each rope
: A 7.00 N window washer is standing on a uniform scaffold supported by a vertical rope at each end. What is the force in each rope when the window washer stands 1.00 m from one end
|
|
Evaluate the mass defect and nuclear binding energy
: Calculate the mass defect and nuclear binding energy per nucleon of the each of the nuclides indicated below. Part A. O-16 (atomic mass = 15.994915 amu) Express your answer using five decimal places.
|
|
What is the angular speed of the rear wheel
: kevin is riding his motorcycle at a speed of 13m/s..if the diameter of the rear wheel is 65 cm, what is the angular speed of the rear wheel
|
|
Explain medicine to children and recovering alcoholics
: Why would pharmaceutical companies choose to use ethanol (CH3CH2OH) as a solvent in their cough medicine solutions, especially considering the fact that many people would prefer to avoid alcohol when they are sick or when administering this medici..
|