ssume Venture Healthcare sold bonds that have a ten-year maturity, a 12 percent coupon rate withannual

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Assume
Venture Healthcare sold bonds that have a ten-year maturity, a 12 percent
coupon rate with
annual
payments, and a $1,000 par value.
a.
Suppose that two years after the bonds were issued, the required interest
rate fell to 7 percent. What
would be the bond’s value?b.
Suppose that two years after the bonds were issued, the required interest
rate rose to 13 percent. What
would be the bond’s value?c.
What would be the value of the bonds three years after issue in each scenario
above, assuming that
interest rates stayed steady at either 7
percent or 13 percent?
ANSWERUNDERSTANDING
HEALTHCARE FINANCIAL MANAGEMENT
Chapter 5 — Debt
Financing
Chapter 7 — Securities
Valuation, Market Efficiency, and Debt Refunding
PROBLEM
2
Twin
Oaks Health Center has a bond issue outstanding with a coupon rate of 7
percent and four years
remaining
until maturity. The par value of the bond is $1,000, and the bond pays
interest annually.
a.
Determine the current value of the bond if present market conditions justify
a 14 percent required rate
of return.b.
Now, suppose Twin Oaks’ four-year bond had semiannual coupon payments. What
would be its current
value? (Assume a 7 percent semiannual
required rate of return. However, the actual rate would be
slightly less than 7 percent because a
semiannual bond is slightly less risky than an annual coupon
bond.)c.
Assume that Twin Oaks’ bond had a semiannual coupon but 20 years remaining to
maturity. What is
the current value under these conditions?
(Again, assume a 7 percent semiannual required rate of
return, although the actual rate would
probably be greater than 7 percent because of increased price
risk.)ANSWERUNDERSTANDING
HEALTHCARE FINANCIAL MANAGEMENT
Chapter 6 — Equity
Financing and Investment Banking
Chapter 7 — Securities
Valuation, Market Efficiency, and Debt Refunding
PROBLEM2Medical
Corporation of America (MCA) has a current stock price of $36, and its last
dividend (D0) was
$2.40.
In view of MCA’s strong financial position, its required rate of return is 12
percent. If MCA’s
dividends
are expected to grow at a constant rate in the future, what is the firm’s
expected stock price in
five years?
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