Finance class Final Exam

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Texas State University *

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5303

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Finance

Date

Feb 20, 2024

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Uploaded by Justme2023

You place $15,000 in a savings account paying an annual compound interest of 7 percent for 4 years and then move it into a savings account that pays 9 percent interest compounded annually. What is the final balance in your account at the end of 10 years? Note: format is $XX,XXX.XX

You purchase a house for $400,000 and pay 20% down. You also agree to pay the rest over the next 30 years in equal monthly payments at 2.75 percent compound interest. What will be the amount of each payment? Note: format is $x,XXX.XX Downpayment = 400,000*20% =80,000 principal amount = $400,000-80000 = $320,000 Interest Rate =2.75% per annum You must calculate EMIs on the home loan using the formula: EMI amount = [P x R x (1+R)^N]/[(1+R)^N-1] where P, R, and N are the variables This also means that the EMI value will change every time you change any of the three variables ‘P’ stands for the Principal Amount. It is the original loan amount given to you by the bank on which the interest will be calculated. ‘R’ stands for the Rate of Interest set by the bank. N is the Number of Years given to you for the repayment of the loan. As home loan EMIs are paid each month, the duration is calculated in the number of months. So, if you take a home loan of Rs $320,000 with an interest rate of 2.75% for 20 years the EMI will be: P = $320,000 , R = 2.75/100/12 =0.229% per month(You convert to months), N = 30 years or 360 months. Home Loan EMI = [320,000 x 2.75/100/12 x (1+2.75/100/12)^360] / [(1+2.75/100/12)^360-1] Home Loan EMIs = $1306.37

Cardinal Health bonds have an annual coupon rate of 3.4 percent and a par value of $1,000 and will mature in 7 years. If you require a 5 percent return, what price would you be willing to pay for a Cardinal bond? Note: format is either $x,xxx.xx or $xxx.xx

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Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk free rate is 1 percent, and the expected return for the market is 9.6 percent. Stock Beta HCA 1.41 Tenet 2.41 CHS 1.54 Formula = Expected Return = Risk-free rate + Beta * (Market Return – Risk-free rate) Stock A 1% + 1.41 * (9.6% - 1%) 1% + 1.41 * 0.086 1% + 0.20726 =13.1% Stock B 1% + 2.41 * 0.086 1% + 0.20726 =21.7% Stock C 1% + 1.54 * 0.086 =14.2%

Cardinal Health bonds are selling in the market for $1,012.50. These 7 year bonds pay 3.41% semi- annually on a $1,000 par value. If the bond is purchased at market price, what is the bond's yield to maturity? Note: format is x.xx% The YTM of the bond can be calculated with the help of RATE function of Excel Inputs required: FV =1000 PV = 1012.50 Nper= 7*2 = 14 Coupon (PMT) = 1000*3.41%/2 = 17.05 The RATE function is: =+RATE(14,17.05,-1012.5,1000,0,0.1) = 1.6046% The above calculated yield is on a semi annual basis Annual YTM= 1.6046%*2 = 3.21%

Suppose one of the suppliers to Ascension Health offers terms of 2/15, net 30. . How many days does the business have to pay its bill from this supplier in order to get the discount? . What is the approximate cost of the costly trade credit offered by this supplier? Note: Assume 360 days per year; format for 'b' is xx.x% a. To get the discount, Mayo Clinic should pay the due amount within 20 days. b. The approximate cost is 73.47% Step-by-step explanation a. The term 2/20, net 30 means that the buyer will receive 2% discount if the buyer pays the due amount within 20 days. Otherwise, the amount is due within 30 days without a discount. b. To get the approximate cost, follow the steps below: 1. Divide the discount percentage which is 2% by the difference between 100% and 2%. The result is 2.0408%. 2. Divide 360 days by the difference between the days credit received of 30 days and discount period of 20 days. The result is 36. 3. Multiply the result in step 1 and step 2 (2.0408% x 36). The result is 73.47% which is the approximate cost. Or you can use the formula below:

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The capital structure for HCA is provided below. If the firm has a 4% after tax cost of debt, 7% commercial loan rate, a 12.5% cost of preferred stock, and an 17% cost of common stock, what is the firm's weighted average cost of capital (WACC)? [a] Note: format is xx.xx% Capital Structure (in K's) Bonds $ 1,083 Commercial Loans $ 2,845 Preferred Stock $ 268 Common Stock $ 3,681 Formula for calculation WACC WACC = KDWD + KLWL + KPWP + KEWE where as, WACC = ? KD = after tax cost of debt = 4% KL = cost of commercial loan = 7% KP = cost of preferred stock = 12.5% KE = cost of common stock = 17% WD = weight of bonds = ?

WL = weight of commercial loan = ? WP = weight of preferred stock = ? WE = weight of common stock = ? Explanationfor step 1: WACC means weighted average cost of capital Calculation of weights total capital value = value of bonds + value of commercial loan + value of preferred stock + cost of common stock Weight of any capital source = capital source value / total capital value Explanationfor step 2 total of weights = weight of bonds + weight of commercial loan + weight of preferred stock + weight of common stock total weights = 0.14+0.36+0.03+0.47 = 1 WACC WACC = KDWD + KLWL + KPWP + KEWE

WACC = 11.445% = 11.45% (approximately) Explanation for step 3 in this question, cost of debt given as after tax cost of debt so we take it directly in WACC calculation. ALSO HERE IS A SHORTER CALCULATION VERSION: Weight of any capital source = capital source value / total capital value Wd =1083/7877 =0.1375 WL=2845/7877 =0.3612 WP =268/7877 =0.0340 WE=3681/7877 =0.4673 WACC = KDWD + KLWL + KPWP + KEWE =4x0.1375 +7x0.3612 +12.5x0.0340 +17x0.4673 =11.4475 =11.45% You are considering buying new laboratory processing system that will require an initial outlay of $65,200. The system has an expected useful life of 5 years and will generate free cash flows to the hospital as a whole of $20,608 at the end of each year over its 5 year life. In addition, the salvage value of the system is expected to be $13,200 based on current market conditions. Given a required rate of return of 15 percent, determine the following: Answer & Explanation: A. The payback period of the project is equal to 3.16 years

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B. The net present value (NPV) of the project is equal to $10,443.95 C. The internal rate of return (IRR) of the project is equal to 21.12% D. Yes, the project should be accepted. 1 Step-by-step explanation: See attachment(s) with explanation below:

Brooke Army Medical Center dispenses 390,000 bottles of brand name pharmaceutical annually. The optimal safety stock (which is on hand initially) is 1,000 bottles. Each bottle costs the center $10, inventory carrying costs are 30%, and the cost of placing an order with its supplier is $175. Calculation of Economic order quantity , Maximum Level , center order days, Number of orders is given below Excel Formula sheet is given below

Final answer: Economic order quantity 6745 Maximum inventory 7745 the center order 6 Number of orders 58 Swedish Medical Center, an HCA owned for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $850,000, has an expected life of five years and an estimated pretax salvage value of $350,000 at that time. The equipment is expected to be used 15 times a day for 360 days a year for each year of the project's life. On average, each procedure is expected to generate $125 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for Year 1 are estimated at 15 X 360 X $125 = $675,000. Labor and maintenance costs are expected to be $270,000 during the first year of operation, while utilities will cost another $10,000 and cash overhead will increase by $5,000 in Year 1. The cost for expendable supplies is expected to average $35 per procedure during the first year. All costs and revenues, except depreciation, are expected to increase at a 3 percent 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 0.2 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06 The hospital's aggregate tax rate is 28 percent, and its corporate cost of capital is 10 percent. The hospital's aggregate tax rate is 28 percent, and its corporate cost of capital is 10 percent. What is the project's NPV? Format is $xxx,xxx or ($xxx,xxx)

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What is the project's IRR? Format is xx.xx% Based on the results of the analysis, should this project be approved? Format is Yes or No Step-by-step explanation: The total of the project's discounted cash flows is its net present value (NPV). The cash flows in this instance are the costs and income related to the new diagnostic tools. The first investment in the project is $850,000. Its revenues for the first year are $675,000, while its costs are $305,000 (labor and maintenance costs of $270,000, utilities costs of $10,000, cash overhead costs of $5,000, and consumable supply costs of $35,000 multiplied by 15 procedures). As a result, Year 1 sees a $370,000 net cash flow. The project generates revenues of $701,500 in Year 2 (15 * 360 * $125 * 1.03) and incurs costs of $315,900 (labor and maintenance: $278,300; utilities: $10,300; cash overhead: $5,100; expendable supplies: $36,250 * 15 procedures). As a result, Year 2 sees a net cash flow of $385,600. The project's discounted cash flows add up to its net present value (NPV). The discount rate in this instance is 10%. Year 1: $370,000 / (1 + 0.10) = $337,273 Year 2: $385,600 / (1 + 0.10)^2 = $348,171 NPV = $337,273 + $348,171 = $685,444 The discount rate that brings the NPV to zero is known as the project's internal rate of return (IRR). The project's NPV in this instance is $685,444. IRR is equal to 10% plus $685,444 / $370,000, or 21.4 percent. The NPV and IRR analysis findings support the project's approval. Because the project's NPV is favorable and its IRR exceeds the hospital's cost of capital, it should be allowed. Yes

Northeast Baptist buys $550,000 of a particular item (at gross prices) from its major supplier, Cardinal Health, which offers NE Baptist terms of 3/20, net 60. Currently, the hospital is paying the supplier the full amount due on Day 60, but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 12 percent rate. Assume 360 days per year What is the amount of free trade credit that the organization obtains from Cardinal Health? _________________Format is $xx,xxx.xx $16,500.00 What is the total amount of trade credit offered by Cardinal? ___________________Format is $xx,xxx.xx $550,000.00 What is the approximate annual cost of the costly trade credit? ________________ Format is xx.xx% 01.08% Should the organization replace a portion of the trade credit with the bank loan? ____________ Format is Yes or No Yes If the bank loan is used, how much of the trade credit should be replaced? ______________Format is $xx,xxx.xx $533,500.00 The amount of free trade credit obtained by Northeast Baptist from Cardinal Health can be determined by subtract the discount period from the credit period and multiply this by the purchase amount. In this case, the credit period is 60 days, and the discount period is 20 days: Free Trade Credit = (Credit Period Discount Period) X Purchase Amount Free Trade Credit Free = (60 – 20) X $500,000 Free Trade Credit = 40 x $500,000 Free Trade Credit = $20,000,000 Therefore, Northeast Baptist obtains of free trade credit from Cardinal Health. The amount of costly trade credit is the difference between the purchase amount and the amount paid if the discount is taken. In this case, the discount is 3%, so the amount paid with the discount would be 97% of the purchase amount: Costly Trade Credit = Purchase Amount = Amount Paid with Discount = $500,000 – (0.97 x $500,000) = $500,000 - $485,000 = $15,000 Therefore, the amount of costly trade credit is $15,000

The approximate annual cost of the costly trade credit can be calculated by divide the cost of trade credit by the discount period and then multiply this by the number of discount periods in a year: Approximate Annual Cost of Costly Trade Credit (Costly Trade Credit Discount Period) X (360 by discount period) = $15,000 / 20 x 360/20 = $750 x 18 = $13,500 The approximate annual cost of the costly trade credit is $13,500 To determine whether Northeast Baptist should replace its trade credit with the bank loan, one need to compare the cost of trade credit with the cost of the bank loan. The cost of trade credit is the approximate annual cost of the costly trade credit calculated. If the bank loan has an annual interest rate of 12%, calculate the cost of the bank loan by multiply the interest rate by the purchase amount: Cost of Bank Loan = Interest Rate x Purchase Amount. = 0.12 x $500,000 = $60,000 Compare the cost of the bank loan with the cost of trade credit and it shows the bank loan is more expensive. Since the cost of the bank loan exceeds the cost of trade credit, this would not be advisable for Northeast Baptist to replace its trade credit with the bank loan. Therefore, there would be no need to determine the amount of trade credit to be replaced.

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HCA must install a new $1.4 million computer to track patient records in its multiple service areas. It plans to use the computer for only three years, at which time a brand new system will be acquired that will handle both billing and patient records. The company can obtain a 10 percent bank loan to buy the computer or it can lease the computer for three years. Assume that the following facts apply to the decision: The computer falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4. The company's marginal tax rate is 34 percent. Tentative lease terms call for payments of $475,000 at the end of each year. The best estimate for the value of the computer after three years of wear and tear is $300,000. What is the NAL of the lease? Format is $xx,xxx.xx or ($xx,xxx.xx) _________________ What is the IRR of the lease? Format is x.xx% or (x.xx)% _________________ Should the organization buy or lease the equipment? Format is Buy or Lease _____________

St David's is evaluating two different computer systems for handling provider claims. There are no incremental revenues attached to the projects, so the decision will be made on the basis of the present value of costs. St David's corporate cost of capital is 7 percent. Here are the net cash flow estimates in thousands of dollars: System X COST 7.00% Cash flows (2,900.00) (1,000.00) (1,000.00) (300.00)

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Year 0 1 2 3 Discounted CF = Cash flow/ (1 + cost) ^ year -2900.00 -934.58 -873.44 -244.89 Cumulative cash flow (2,900.00) (3,834.58) (4,708.02) (4,952.91) PV of cost = 4952.91 System Y COST 7.00% Cash flows (2,350.00) (1,000.00) (1,000.00) (1,000.00) Year 0 1 2 3

Discounted CF = Cash flow/ (1 + cost) ^ year -2350.00 -934.58 -873.44 -816.30 Cumulative cash flow (2,350.00) (3,284.58) (4,158.02) (4,974.32) PV of cost = 4974.32 So X is slightly better So, X will have a rate of 9% Cash flows (2,900.00) (1,000.00) (1,000.00) (300.00) Year 0 1 2 3 Discounted CF = Cash flow/ (1 + cost) ^ year -2900.00 -917.43 -841.68 -231.66

Cumulative cash flow (2,900.00) (3,817.43) (4,659.11) (4,890.77) X should be chosen again.

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Finance class Final Exam

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