Expert answer:Mini-Cases from Chapters 4, 5, 6 Mini-Cases from C
Expert answer:This is a 2 part project and needs to be done in xcel format and all questions need to be answered I have attached both sheets if you have any questions feel free to ask!
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HCM565
Module 7 Portfolio Project, Part 1
Mini Case Chapter 4
John Adams is the CEO of a nursing home in San Jose. He is now 50 years old and plans to retire
in ten years. He expects to live for 25 years after he retires—that is, until he is 85. He wants a
fixed retirement income that has the same purchasing power at the time he retires as $40,000
has today (he realizes that the real value of his retirement income will decline year by year after
he retires). His retirement income will begin the day he retires, ten years from today, and he
will then get 24 additional annual payments. Inflation is expected to be 5 percent per year for
ten years (ignore inflation after John retires); he currently has $100,000 saved up; and he
expects to earn a return on his savings of 8 percent per year, annual compounding. To the
nearest dollar, how much must he save during each of the next ten years (with deposits being
made at the end of each year) to meet his retirement goal? (Hint: The inflation rate 5 percent
per year is used only to calculate desired retirement income.)
Mini Case Chapter 5
Assume that you recently graduated and you just landed a job as a financial planner with the
Cleveland Clinic. Your first assignment is to invest $100,000. Because the funds are to be
invested at the end of one year, you have been instructed to plan for a one-year holding period.
Further, your boss has restricted you to the following investment alternatives, shown with their
probabilities and associated outcomes.
State of
Economy
Recession
Below
Average
Average
Above
Average
Boom
Probability T-Bills
0.1
0.2
8.00%
8.00%
Alta
Inds.
-22.0%
-2.0%
Repo
Men
28.0%
14.7%
American
Foam
10.0%
-10.0%
Market
Port.
-13.0%
1.0%
0.4
0.2
8.00%
8.00%
20.0%
35.0%
0.0%
-10.0%
7.0%
45.0%
15.0%
29.0%
0.1
8.00%
50.0%
-20.0%
30.0%
43.0%
Barney Smith Investment Advisors recently issued estimates for the state of the economy and
the rate of return on each state of the economy. Alta Industries, Inc. is an electronics firm; Repo
Men Inc. collects past due debts; and American Foam manufactures mattresses and various
other foam products. Barney Smith also maintains an “index fund” which owns a marketweighted fraction of all publicly traded stocks; you can invest in that fund and thus obtain
average stock market results. Given the situation as described, answer the following questions.
a. Calculate the expected rate of return on each alternative.
b. Calculate the standard deviation of returns on each alternative.
c. Calculate the coefficient of variation on each alternative.
d. Calculate the beta on each alternative.
e. Do the SD, CV, and beta produce the same risk ranking? Why or why not?
f. Suppose you create a two-stock portfolio by investing $50,000 in Alta Industries and $50,000
in Repo Men. Calculate the expected return, standard deviation, coefficient of variation, and
beta for this portfolio. How does the risk of this two-stock portfolio compare with the risk of the
individual stocks if they were held in isolation?
Mini Case Chapter 6
Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Group Health
Cooperative and codirectors of the organization’s pension fund management division. The
unions that represent the GHC hospital staff have requested an investment seminar so that
they better understand the decisions being made on behalf of their members. Strother and
Tibbs, who will make the actual presentation, have asked you to help them by answering the
following questions.
a. What is the value of a ten-year, $1,000 par value bond with a 10 percent annual coupon if its
required rate of return is 10 percent?
b. What would be the value of the bond described in question a. if, just after it had been issued,
the expected inflation rate rose by 3 percentage points, causing investors to require a 13
percent return? Would we now have a discount or a premium bond?
c. What would be the value of the bond described in question a. if, just after it had been issued,
the expected inflation rate fell by 3 percentage points, causing investors to require a 7 percent
return? Would we now have a discount or a premium bond?
d. What would happen to the value of the ten-year bond over time if the required rate of return
remained at 13 percent, remained at 7 percent, or remained at 10 percent? Graph your results
using the table below:
N
0
1
2
3
4
Value of Bond in Given Year:
7%
10%
13%
5
6
7
8
9
10
e. What is the yield to maturity on a ten-year, 9 percent annual coupon, $1,000 par value bond
that sells for $887.00?
f. What are the total return, the current yield, and the capital gains yield for the bond in
question e.? (Assume the bond is held to maturity and the company does not default on the
bond.)
HCM565
Module 8 Portfolio Project, Part 2
Mini Case Chapter 8
Lewis Health System Inc. has decided to acquire a new electronic health record system for its
Richmond hospital. The system receives clinical data and other patient information from
nursing units and other patient care areas, then either displays the information on a screen or
stores it for later retrieval by physicians. The system also permits patients to call up their health
record on Lewis’s website.
The equipment costs $1,000,000, and, if it were purchased, Lewis could obtain a term loan for
the full purchase price at a 10 percent interest rate. Although the equipment has a six-year
useful life, it is classified as a special-purpose computer, so it falls into the MACRS three-year
class. If the system were purchased, a four-year maintenance contract could be obtained at a
cost of $20,000 per year, payable at the beginning of each year. The equipment would be sold
after four years, and the best estimate of its residual value at that time is $200,000. However,
since real-time display system technology is changing rapidly, the actual residual value is
uncertain.
As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis
that Consolidated Leasing would be willing to write a four-year guideline lease on the
equipment, including maintenance, for payments of $260,000 at the beginning of each year.
Lewis’s marginal federal-plus-state tax rate is 40 percent. You have been asked to analyze the
lease-versus-purchase decision, and in the process to answer the following questions:
a. What is the present value cost of owning the equipment?
b. What is the present value cost of leasing the equipment?
c. What is the net advantage to leasing (NAL)?
d. Answer these questions one at a time to see the effect of the change on NAL. That is, starting
with the original numbers you used for questions a. and b., what is the NAL if:
– interest rate increases to 12 percent
– the tax rate falls to 34 percent
– maintenance cost increases to $25,000 per year
– residual value falls to $150,000
– the system price increases to $1,050,000
e. Do the changes in d. make leasing more or less attractive? Explain.
Mini Case Chapter 11
James Polk Hospital has currently unused space in its lobby. In three years, the space will be
required for a planned expansion, but the hospital is considering uses of the space until then.
The hospital has decided that it wants to purchase at least one and maybe two fast food
franchises, to take advantage of the high volume of patients and visitors that walk through the
lobby all day long. The hospital plans to purchase the franchise(s), operate them for three
years, and then close them down. The hospital has narrowed its selection down to two choices:
Franchise L: Lisa’s Soups, Salads, and Stuff
Franchise S: Sam’s Wonderful Fried Chicken
The net cash flows shown below include the costs of closing down the franchises in Year 3 and
the forecast of how each franchise will do over the three-year period. Franchise L serves
breakfast and lunch, while Franchise S serves only dinner, so it is possible for the hospital to
invest in both franchises. The hospital believes these franchises are perfect complements to
one another: The hospital could attract both the breakfast/lunch and dinner crowds and both
the health-conscious and not-so-health-conscious crowds without the franchises directly
competing against one another. The corporate cost of capital is 10 percent.
Year
0
1
2
3
Net cash flows
Franchise Franchise
S
L
-$100
-$100
$70
$10
$50
$60
$20
$80
a. Calculate each franchise’s payback period, net present value (NPV), internal rate of return
(IRR), and modified internal rate of return (MIRR).
b. Graph the NPV of each franchise at different values of the corporate cost of capital from 0 to
24 percent in 2 percent increments.
– How sensitive are the franchise NPVs to the corporate cost of capital?
– Why do the franchise NPVs differ in their sensitivity to the corporate cost of capital?
– At what cost of capital does each franchise intersect the X-axis? What are these values?
c. Which project or projects should be accepted if they are independent? Which project should
be accepted if they are mutually exclusive?
d. Suppose the hospital could sell off the equipment for each franchise at the end of any year.
Use NPV to determine the optimal economic life of each franchise when the salvage values are
as follows:
Year
0
1
2
3
Salvage value
Franchise Franchise
S
L
$100
$100
$60
$70
$20
$30
$0
$0
Mini Case Chapter 13
Donna Jamison, a recent UNC graduate with four years of for-profit health management
experience, was recently brought in as assistant to the chairman of the board of Computron
Diagnostics, a manufacturer of clinical diagnostic equipment. The company had doubled its
plant capacity, opened new sales offices outside its home territory, and launched an expensive
advertising campaign. Computron’s results were not satisfactory, to put it mildly. Its board of
directors, which consisted of its president and vice president plus its major stockholders (who
were all local business people), was most upset when directors learned how the expansion
was going. Suppliers were being paid late and were unhappy, and the bank was complaining
about the cut off credit. As a result, Al Watkins, Computron’s president, was informed that
changes would have to be made, and quickly, or he would be fired. Also, at the board’s
insistence, Donna Jamison was brought in and given the job of assistant to Fred Campo, a
retired banker who was Computron’s chairman and largest stockholder. Campo agreed to give
up a few of his golfing days and help nurse the company back to health, with Jamison’s
assistance.
Jamison began by gathering financial statements and other data, shown below. The data show
the dire situation that Computron Diagnostics was in after the expansion program. Thus far,
sales have not been up to the forecasted level, costs have been higher than were projected,
and a large loss occurred in Year 2, rather than the expected profit. Jamison examined monthly
data for Year 2 (not given in the case), and she detected an improving pattern during the year.
Monthly sales were rising, costs were falling, and large losses in the early months had turned to
a small profit by December. Thus, the annual data look somewhat worse than final monthly
data. Also, it appears to be taking longer for the advertising program to get the message across,
for the new sales offices to generate sales, and for the new manufacturing facilities to operate
efficiently. In other words, the lags between spending money and deriving benefits were longer
than Computron’s managers had anticipated. For these reasons, Jamison and Campo see hope
for the company—provided it can survive in the short run. Jamison must prepare an analysis of
where the company is now, what it must do to regain its financial health, and what actions
should be taken.
Computron Diagnostics
Statement of Operations
Yr 1 Actual Yr 2 Actual
Revenue:
Net patient service revenue
Other revenue
Total revenues
Expenses:
Salaries and benefits
Yr 3
Projected
$3,432,000
$0
$3,432,000
$5,834,400
$0
$5,834,400
$7,035,600
$0
$7,035,600
$2,864,000
$4,980,000
$5,800,000
Supplies
Insurance and other
Drugs
Depreciation
Interest
Total expenses
Operating income
Provision for income taxes
Net income
$240,000
$50,000
$50,000
$18,900
$62,500
$3,285,400
$146,600
$58,640
$87,960
$620,000
$50,000
$50,000
$116,960
$176,000
$5,992,960
-$158,560
-$63,424
-$95,136
Computron Diagnostics
Balance Sheet
Yr 1 Actual Yr 2 Actual
Assets
Current assets:
Cash
Marketable securities
Net accounts receivable
Inventories
Total current assets
Property and equipment
Less accumulated
depreciation
Net property and equipment
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Notes payable
Current portion of long-term debt
Total current liabilities
Long-term debt
Shareholders’ equity:
Common stock
Retained
earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$512,960
$50,000
$50,000
$120,000
$80,000
$6,612,960
$422,640
$169,056
$253,584
Yr 3
Projected
$9,000
$48,600
$351,200
$715,200
$1,124,000
$491,000
$146,200
$7,282
$20,000
$632,160
$1,287,360
$1,946,802
$1,202,950
$263,160
$14,000
$71,632
$878,000
$1,716,480
$2,680,112
$1,220,000
$383,160
$344,800
$1,468,800
$939,790
$2,886,592
$836,840
$3,516,952
$145,600
$136,000
$120,000
$80,000
$481,600
$323,432
$324,000
$284,960
$640,000
$80,000
$1,328,960
$1,000,000
$359,800
$380,000
$220,000
$80,000
$1,039,800
$500,000
$460,000
$203,768
$460,000
$97,632
$1,680,936
$296,216
$663,768
$1,468,800
$557,632
$2,886,592
$1,977,152
$3,516,952
Other data:
Stock price
Shares outstanding
Tax rate
Lease payments
$8.50
100,000
40%
$40,000
Yr 1 Actual
$6.00
100,000
40%
$40,000
Yr 2 Actual
$12.17
250,000
40%
$40,000
Yr 3
Projected
Profitability ratios
Total margin
Return on assets
Return on equity
Liquidity ratios
Current ratio
Days cash on hand
Debt management (capital structure) ratios
Debt ratio
Debt to equity
ratio
Times-interest-earned ratio
Cash flow coverage ratio
Asset management (activity) ratios
Fixed asset turnover
Total asset turnover
Days sales outstanding
Other ratios
Average age of plant
Earnings per share
Book value per share
Price/earnings ratio
Market/book
ratio
Industr
y
Averag
e
3.6%
9.0%
17.9%
2.70
22.0
50.0%
2.5
6.2
8.00
7.00
2.50
32.0
6.1
n/a
n/a
16.20
2.90
Computron Diagnostics
Common Size Statement of Operations
Yr 1 Actual
Yr 2 Actual
Yr 3
Projected
Industr
y
Averag
e
Revenue:
Net patient service revenue
Other revenue
Total revenues
Expenses
:
Salaries and benefits
100.0%
0.0%
100.0%
84.5%
3.9%
Supplies
Insurance and other
Provision for bad debts
Depreciation
Interest
Total expenses
Operating income
Provision for income taxes
Net income
0.3%
0.3%
4.0%
1.1%
94.1%
5.9%
2.4%
3.5%
Computron Diagnostics
Common Size Balance
Sheet
Yr 1 Actual Yr 2 Actual
Assets
Current assets:
Cash
Marketable securities
Net accounts receivable
Inventories
Total current assets
Property and equipment
Less accumulated
depreciation
Net property and equipment
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Notes payable
Current portion of long-term debt
Total current liabilities
Yr 3
Projected
Industr
y
Averag
e
0.3%
0.3%
22.3%
41.2%
64.1%
53.9%
18.0%
35.9%
100.0%
10.2%
9.5%
2.4%
1.6%
23.7%
Long-term debt
Shareholders’ equity:
Common stock
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
26.3%
20.0%
30.0%
50.0%
100.0%
…
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