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Grantham University Issuing Debt and Bond Valuation for Non Profit Questions

Grantham University Issuing Debt and Bond Valuation for Non Profit Questions

Question Description

Issuing Debt and Bond Valuation

Submit written responses to these questions.

  1. What avenues are available for for-profit and not-for-profit health care providers to increase their equity position?
  2. What are the advantages and disadvantages to a taxpaying entity in issuing debt as opposed to equity?
  3. Explain the difference between subordinate debentures and debentures.
  4. Why would an investment banker syndicate a bond issue with other investment bankers?
  5. If a $1,000 zero coupon bond with a 20-year maturity has a market price of $311.80, what is its rate of return?

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.

  1. If a required market rates are 8 percent, what is the market price of the bond?
  2. If required market rates fall to 5 percent, what is the market price of the bond?

Charles City Hospital plans on issuing a tax-exempt bond of $1,000, maturity term of 20 yrs. and a coupon rate of 6%.

  1. If required market rates are 6 percent, what is the value of the bond?
  2. If required market rates fall to 12 percent what is the value of the bond?
  3. At what required market rate (3,6, or 12 percent) does the above bond sell at a discount? At a premium?
  4. Mercy Medical Mega Center , a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $400,000 and will be depreciated on straight-line basis over five years to a zero salvage value. Mercy Medical could borrow the full amount at a 15 percent rate for five years. The after-tax cost of debt equals 9 percent. Alternatively, it could lease the device for five years. The before-tax lease payments per year would be $80,000. The tax rate for this MegaCenter is 40 percent. From a financial perspective, should Mercy lease the surgical device or borrow the money to purchase it and why?

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