Consider the following scenario: You are the Comptroller for a healthcare organization and you are tasked...

  

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Consider the following scenario: You are the Comptroller for a healthcare organization and you are tasked with analyzing p scenarios regarding their funding. Problem #1: Changing Debt & Interest Rates • They have an operating income of 1,500,000 SAR They have assets of 7,500,000 SAR The Tax rate is 22.5% They currently do not have any debt but are considering the following scenarios: Scenario A No debt Scenario B Interest rate 9.5% B1 increase debt to 2,500,000 SAR B2 increase debt to 5,000,000 SAR Scenario C Interest rate 12.5% B1 increase debt to 2,500,000 SAR B2 increase debt to 5,000,000 SAR Based on the above information, address the following questions: Compare Scenario A (no debt) to Scenario B (increasing debt 9.5% interest rate) a. What impact does increasing the debt have on the taxable income? b. What impact does increasing the debt have on the net income? c. What impact does increasing the debt have on the dollar return to investors? Compare Scenario B (increasing debt 9.5% interest rate) to Scenario C (increasing debt 1 rate) a. What impact does the higher interest rate have on the taxable income? b. What impact does the higher interest rate have on the net income? c. What impact does the higher interest rate have on the dollar return to investors? Scenario D Zero Debt Probability EBIT 0.1 0.5 0.4 $1,250,000 $1,500,000 $1,750,000 Calculate: a. The expected net income for each probability b. The expected dollar return to investors for each probability c. The expected ROE for each probability d. What the company can expect its net income to be given these probabilities e. What the company can expect dollar return to investors to be given these probabilities f. What the company can expect its ROE to be given these probabilities Scenario E Probability EBIT 0.5 0.1 $1,250,000 $1,500,000 However, assume the company now has 5,000,000 SAR Debt Calculate: a. The expected net income for each probability b. The expected dollar return to investors for each probability c. The expected ROE for each probability d. What the company can expect its net income to be given these probabilities e. What the company can expect dollar return to investors to be given these probabilities f. What the company can expect its ROE to be given these probabilities 0.4 $1,750,000 Based upon those calculations answer the following questions: a. Does the increased leverage offer the potential of an increased ROE? b. What impact does the increased leverage have on the risk to stock holders? c. Is it always a good idea to use debt financing? Make recommendations to the organization as to the course of action that they should follow considering all risk factors. Please make certain that you show your calculations. Submit your findings in a proposal to the hospital. Consider the following scenario: You are the Comptroller for a healthcare organization and you are tasked with analyzing p scenarios regarding their funding. Problem #1: Changing Debt & Interest Rates • They have an operating income of 1,500,000 SAR They have assets of 7,500,000 SAR The Tax rate is 22.5% They currently do not have any debt but are considering the following scenarios: Scenario A No debt Scenario B Interest rate 9.5% B1 increase debt to 2,500,000 SAR B2 increase debt to 5,000,000 SAR Scenario C Interest rate 12.5% B1 increase debt to 2,500,000 SAR B2 increase debt to 5,000,000 SAR Based on the above information, address the following questions: Compare Scenario A (no debt) to Scenario B (increasing debt 9.5% interest rate) a. What impact does increasing the debt have on the taxable income? b. What impact does increasing the debt have on the net income? c. What impact does increasing the debt have on the dollar return to investors? Compare Scenario B (increasing debt 9.5% interest rate) to Scenario C (increasing debt 1 rate) a. What impact does the higher interest rate have on the taxable income? b. What impact does the higher interest rate have on the net income? c. What impact does the higher interest rate have on the dollar return to investors? Scenario D Zero Debt Probability EBIT 0.1 0.5 0.4 $1,250,000 $1,500,000 $1,750,000 Calculate: a. The expected net income for each probability b. The expected dollar return to investors for each probability c. The expected ROE for each probability d. What the company can expect its net income to be given these probabilities e. What the company can expect dollar return to investors to be given these probabilities f. What the company can expect its ROE to be given these probabilities Scenario E Probability EBIT 0.5 0.1 $1,250,000 $1,500,000 However, assume the company now has 5,000,000 SAR Debt Calculate: a. The expected net income for each probability b. The expected dollar return to investors for each probability c. The expected ROE for each probability d. What the company can expect its net income to be given these probabilities e. What the company can expect dollar return to investors to be given these probabilities f. What the company can expect its ROE to be given these probabilities 0.4 $1,750,000 Based upon those calculations answer the following questions: a. Does the increased leverage offer the potential of an increased ROE? b. What impact does the increased leverage have on the risk to stock holders? c. Is it always a good idea to use debt financing? Make recommendations to the organization as to the course of action that they should follow considering all risk factors. Please make certain that you show your calculations. Submit your findings in a proposal to the hospital.

Answer rating: 100% (QA)

Lets start by addressing the questions We will calculate the impact of increasing debt on taxable income net income and the dollar return to investors for both scenarios Starting with Scenario A No de... View the full answer