Healthcare Finance - Speech or Presentation Example

Healthcare Finance Southwest physicians, a medical group practice, are just being formed. It will need $3,000,000 of total assets to generate $ 5,000,000 in revenues. Furthermore, the group expects to have a profit margin of 5 percent. The group Is considering two financing alternatives. First, it can use all-equity financing by requiring each physicians to contribute his or her pro rata share. Alternatively, the practice can finance up to 50% of its assets with a bank loan. Assume that the debt alternate has no impact on the expected profit margin.

What is the expected return on equity (ROE) if the group finances with 50 percent debt? Net profit $ 5,000,000 x 0.05 = $250000 Consequently ROE = $250000/$3000000 = 8.3% What is the expected return on equity (ROE) if the group finances entirely with equity capital? Bank loan = 50% Equity = 50% Therefore ROE = $250000/$1500000 = 16.67% 2) Consider the following uneven cash flow stream: Year Cash flow 0 $0 1 350 350/(1+0.10)^1 = 318.1818 2 500 500/(1+0.10)^2 = 413.22 3 650 650/(1+0.10)^3 = 488.

35 4 750 750/(1+0.10)^4 = 512.26 5 750 750/(1+0.10)^5 = 465.69 Total 2197.711 Add an outflow (or cost) of $1,000 at year 0. What is the present value (or net present value) of the stream? 2197.711 + 1000 = $3197.71 What is the present value if the opportunity cost (discount) rate is 10%? Year Cash flow 0 $0 1 350 350/(1+0.10)^1 = 318.1818 2 500 500/(1+0.10)^2 = 413.22 3 650 650/(1+0.10)^3 = 488.35 4 750 750/(1+0.10)^4 = 512.26 5 750 750/(1+0.10)^5 = 465.69 Total 2197.711 3) Assume venture healthcare sold bonds that have a 20 year maturity, a 11 percent coupon rate with annual payments, and a $1,000 par value.

What would be the value of the bonds three years after issue if the required interest rate were 7 percent? =9.76 + 316.46 = 326.22 What would be the value of the bonds three years after issue if the required interest rate were 13 percent? 6.72 + 125.15 = 131.88 Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent, what would be the bond’s value? 10.05 + 295.86 = 305.91 Suppose that two years after the bonds were issued, the required interest rate rose to 13percent, what would be the bond’s value? 375.94 + 12.70 = 363.24 4) Assume that you are the chief financial officer at porter memorial hospital .

the CEO has asked you to analyze two proposed capital investments. The project expected cash flows: Year Project X Project Y 0 ($10,000) ($10,000) 1 5,500 3,500 2 4,000 3,500 3 4,000 3,500 4 1,500 3,500 What is the internal rate of return (IRR) for project X? Solving for R which is the IRR, we get 22.483% What is the net present value (NPV) for project X? What is the net present value (NPV) for project Y? What is the internal rate of return (IRR) for project Y? Solving for R which is the IRR, we get 14.

963% What is the project payback period for project X? What is the project payback period for project Y? Which project is acceptable? Project X is acceptable since it has the highest NPV value and takes the minimum years as the payback period. Project x would be most beneficial.