Problem 1, Financial Management

You work for a small, for-profit health system. Your system is interested in acquiring a Critical Access Hospital (CAH) at a price of $65,000,000. The purchase would be made from retained earnings but your organization’s traditional cost of capital is 7%. Based on sophisticated financial forecasting models you expect the CAH to generate $3,900,000 in profit annually for 30 years. Given your system’s cost of capital (7%), this investment would lose money. However, one of your colleagues has suggested that due to subsidized Medicare reimbursement, the CAH revenues will be less risky and may help the system diversify.

Use CAPM with the historical data on system and CAH quarterly profits to estimate the appropriate discount rate assuming that the risk-free cost of capital is 3%.

Question

Is this a wise investment?
Posted Date: 2/5/2013 3:32:15 PM | Location : Saudi Arabia







Related Discussions:- Problem 1, Assignment Help, Ask Question on Problem 1, Get Answer, Expert's Help, Problem 1 Discussions

Write discussion on Problem 1
Your posts are moderated
Related Questions
Provide three examples of mutually exclusive projects. Mutually elite projects are projects that compete against each other for our selection.  If a firm were considering the b

What is the Modigliani and Miller theory of dividends?  Explain. The Modigliani-Miller theory of dividends states that dividend theory is not relevant.  They state that it is the

FORMS OF DIVIDEND Cash Dividend Many Companies pay dividend in cash. Often cash dividend may be supplemented by a bonus issue (stock dividend).  When the company chooses


Q. Show Limitations of Profit maximization? The Profit maximization criterion is criticized on the following grounds: i) Quality of Benefits: Profit maximization approach ig

I am facing some problems in my assignment of Portfolio Management. Can anybody suggest me the proper explanation for it?


The key parameters taken into account while rating a debt instrument are as follows: 1. Industry Evaluation - This involves an evaluation of the

Policy Conflicts in Debt and Monetary Management: Co-ordination of operations is important so as to avoid differences in the policies of cash and debt management of the governm

What are the main implications of ownership rights by equity claims? Ownership rights have two primary implications: a. First, equity holders can advantage by any raise in t