Issuing Debt and Bond Valuation Essay
Issuing Debt and Bond Valuation
1. Internally generated funds and stock issuances are available for for-profit and internally generated funds, philanthropy, government grants, and sale of real estate are available to not-for-profit health care providers to increase their equity position.
2. The advantages of a taxpaying entity in issuing debt are fixed debt service payments, fixed interest rate, no risk ha investor sells bond back, and no leer of credit needed, while disadvantages are higher issuance expenses, may result in higher interest cost over life of loan, no refunds for bonds, unstable deb service payments, and decline in cash flow if interest rates increase.
3. Debenture is an unsecured bond, which is not backed by specific assets of the organization; so, it carries higher risk with a high interest rate. On the other hand, subordinated debenture is an unsecured bond that is junior to debenture bonds.
In a case of default, the bondholders are paid first.
4. An investment banker syndicate a bond issue with other investment bankers to work as an underwriter for private placements to sell to a particular institution or group of institutions (banks, pension funds, or insurance companies).
5. $1,000 zero coupon bond with a 20-year maturity has a market price of $311.80. Rate of return = (1000 / 311.80)^(1/20) = 1.7 1000 / 311.80 tells you how many times the money multiplies over 20 years.
6. A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $1,000.
7. If required market rates are 8 percent, the market price of the bond = $80 x PVFA (0.08,20) + $1000 x PVF (0.08, 20) = $80 x 9.8181 + $1000 x 0.2145 = $1000 8. If required market rates fall to 5 percent, the market price of the bond = $80 x (0.08,20) + $1000 x (0.05,20) = $750 9. Charles City Hospital plans on issuing a tax-exempt bond at the bond are $1,000. 10. If required market rates are 6 percent, the value of the bond= 60 x PVFA (0.06,1)+1000 x PVF (0.06,1)= 60 x 0.943 + 1000 x 0.943=$996.4 11. If required market rates fall to 12 percent, the value of the bond=120 x PVFA (0.12,1) + 1000 x PVF (0.12,1) = 120 x 0.892 + 1000 x 0.892 = $ 996.8 12. Since 3 percent, 6 percent, and 12 percent values are lower than $1000. They are sold at a discount. 13. Option#1 Device cost 400,000
Useful value 5
Yearly Depreciation 80,000,00
Interest rate 15%
Loan period 5
Loan yearly installments 119,326.22
Lease Yearly Payment $80,000.00
Difference between loan & Lease $39,326.22
Tax Saving=Yearly Depreciation X 40% =$32,000.00=$400,000/5 years X Tax %
After tax cost of debt $3,539.00 interest component X after tax rate 9%
Total saving from option#1 $35,539.00
Option #1 (Borrowing) $83,787.22
Option#2 (Leasing) $80,000.00
Therefore, Mercy medical mega center should lease the surgical device because the total cost will be less than to borrow the money to purchase the device.