Student Name:

PROBLEM 1: Week 3 and Week 4 Debt Financing

Assume HCA sold bonds that have a ten-year maturity, a 13 percent coupon rate with

annual payments, and a $1,000 par value.

a. Suppose that two years after the bonds were issued, the required interest rate fell to 12 percent. What

would be the bond's value?

b. Suppose that two years after the bonds were issued, the required interest rate rose to 14 percent. What

would be the bond's value?

PROBLEM 2 : Week 3 and Week 4 Debt Financing

Tenet Healthcare, has a bond issue outstanding with eight years remaining to maturity,

a coupon rate of 9 percent with interest paid annually, and a par value of $1,000. The current market

price of the bond is $1,251.22.

a. What is the bond's yield to maturity?

b. Now, assume that the bond has semiannual coupon payments. What is its yield to maturity in this

situation?

PROBLEM 3: Week 3 and Week 4 Debt Financing

United Health Group has bonds outstanding that have four years remaining to maturity,

a coupon interest rate of 8 percent paid annually, and a $1,000 par value.

a. What is the yield to maturity on the issue if the current market price is $829?

b. If the current market price is $1,104?

c. Would you be willing to buy one of these bonds for $829 if you required a 12 percent rate of return on

the issue? Explain your answer.

Student Name:

PROBLEM 1: Week 3 and Week 4 Equity Financing

Liberty Rehab Corporation has a current stock price of $56, and its last dividend (D0) was

$5.00. In view of the company's strong financial position, its required rate of return is 10 percent. If Liberty's

dividends are expected to grow at a constant rate in the future, what is the firm's expected stock price in

five years?

Constant Growth Rate:

Expected Stock Price in 5 Years:

PROBLEM 2: Week 3 and Week 4 Equity Financing

Your personal financial advisor is trying to get you to buy the stock of Eagle Healthcare, a

local drug and alcohol rehabilitation company. The stock has a current market price of $35, its last dividend (D0) was $2.50,

and the company's earnings and dividends are expected to increase at a constant growth rate of 8 percent. The

required return on this stock is 15 percent. From a strict valuation standpoint, should you buy the

stock?

Include the solution for deciding to buy or not buy the stock.

Student Name:

PROBLEM 1: Week 3 and Week 4 Cost of Capital

St. David's Hospital in Austin, Texas has a target capital structure of 35 percent debt and 65 percent equity. Its cost of

equity (fund capital) estimate is 13.5 percent and its cost of debt is 7 percent. If it has a 35% tax rate, what

is the hospital's corporate cost of capital?

PROBLEM 2: Week 3 and Week 4 Cost of Capital

The capital structure for HCA is provided below. If the firm has a 5% after tax cost of debt, 9% commerical loan rate,

a 11.5% cost of preferred stock, an 15% cost of common stock, and given the dollar amounts provided below, what is the firm's

weighted average cost of capital (WACC)?

Capital Structure (in K's)

Weights

Individual Costs

Weighted Costs

Bonds

$ 1,083

5.00%

Commercial Loans

$ 2,845

9.00%

Preferred Stock

$ 268

11.50%

Common Stock

$ 3,681

15.00%