Reference no: EM133368343
Question 1: The capital structure for Capital Health is provided below. If the firm has a 8% after tax cost of long term debt, 12% commerical loan rate, 6% commerical paper rate, short term bond rate of 5%, a 9% cost of preferred stock, and an 15% cost of common stock, what is the firm's weighted average cost of capital (WACC)?
| Capital Structure (in K's) |
|
Individual Costs |
Weighted Costs |
| Long Term Bonds |
$ 3,000 |
|
8.00% |
|
|
| Commercial Loans |
$ 2,845 |
|
12.00% |
|
|
| Commercial Paper |
$ 1,500 |
|
6.00% |
|
|
| Short Term Bonds |
$ 1,200 |
|
5.00% |
|
|
| Preferred Stock |
$ 500 |
|
9.00% |
|
|
| Common Stock |
$ 4,500 |
|
15.00% |
|
|
Question 2: You are considering buying a new laboratory blood analysis system that will require an initial outlay of $80,000. The system has an expected useful life of 5 years and will generate free cash flows to the hospital as a whole of $15,000 at the end of each year over its 5 year life. In addition, the salvage value of the system is expected to be $10,000 based on current market conditions. Given a required rate of return of 12 percent, determine the following:
| |
|
|
|
|
|
Year |
Cash Flow |
Cumulative |
| [a] Payback Period |
|
|
|
|
0 |
$ (80,000) |
$ (80,000) |
| [b] NPV |
|
|
|
|
|
1 |
$ 15,000 |
$ (65,000) |
| [c] IRR |
|
|
|
|
|
2 |
$ 15,000 |
$ (50,000) |
| [d] Should this project be accepted? |
|
|
3 |
$ 15,000 |
$ (35,000) |
| |
|
|
|
|
|
4 |
$ 15,000 |
$ (20,000) |
| |
|
|
|
|
|
5 |
$ 25,000 |
$ 5,000 |
Question 3: HCA is evaluating the bulk purchase of new Hill-Rom hospital beds for its Central & West Texas region.
The purchase will cost $35,000,000 and the beds have an expected life of five years.
The expected pretax salvage value after five years of use is $3,500,000.
In total, the beds are expected to generate $8,000,000 in revenue in the first year of operations.
Maintenance costs are expected to be $200,000 during the first year of operation, while the increase in utilities will cost another $100,000 acoss the system in Year 1. The cost for additional expendable supplies is expected to average $250,000 during the first year. All costs and revenues, except depreciation, are expected to increase at a 2.8% inflation rate after the first year.
The equipment falls into the MACRS five-year class for tax depreciation and hence is subject to the following depreciation allowances:
| Year |
Allowance |
| 1 |
20% |
| 2 |
32% |
| 3 |
19% |
| 4 |
12% |
| 5 |
11% |
| 6 |
6% |
The hospital's aggregae tax rate is 21.15%, and its corporate cost of capital is 8.4%.
a. Estimate the project's net cash flows over its five-year estimated life.
b. What are the project's NPV and IRR? (Assume that the project has average risk.)
c. Based on the results of the analysis, should this project be approved?
a. Show Projected Cash Flows
b. NPV Compare to "0"
IRR Compare to WACC
Question 4: Recovery Centers of America needs to acquire new vehicles that will cost $2.5 million across its six state service area.
It plans to use the vehicles for three years, at which time new vehicles will be acquired. The company can obtain a 3.49 percent bank loan to buy the vehicles or it can lease the vehicles for three years. Assume that the following facts apply to the decision:
- The vehicles fall into the five-year class for tax depreciation, so the MACRS allowances are 0.2, 0.32, 0.19, 0.12, 0.11, and 0.06 in Years 1 through 6, respectively.
- The company's marginal tax rate is 28 percent.
- Tentative lease terms call for payments of $550,000 at the end of each year.
- The best estimate for the value of the vehicles after three years of wear and tear is $1,350,000.
a. What is the NAL and IRR of the lease?
b. Should the organization buy or lease the equipment?
| Year |
Allowance |
| 1 |
20% |
| 2 |
32% |
| 3 |
19% |
| 4 |
12% |
| 5 |
11% |
| 6 |
6% |
Attachment:- Excel Workbook.rar