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Debt Financing Questions

29. Bond valuation. Currently, Boston Common Community Hospital's tax-exempt bond is selling for $626.53 per bond and has a remaining maturity of twenty years. If the par value is $1,000 and the coupon rate is 7 percent, what is the yield to maturity?

30. Loan amortization. Land Hope Hospital needs to borrow $1,000,000 to purchase an MRI. The interest rate for the loan is 8 percent. Principal and interest payments are equal debt service payments, made on an annual basis. The length of the loan is five years. The CEO of Land Hope wants to develop a loan amortization schedule for this debt borrowing for tomorrow morning's meeting. Prepare such a schedule.

31. Purchase versus lease. Mercy Medical Mega Center, a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $500,000 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 12 percent rate for five years. The after-tax cost of debt equals 8 percent. Alternatively, it could lease the device for five years. The before-tax lease payments per year would be $90,000. The tax rate for this Mega Center is 40 percent. From a financial perspective, should Mercy lease the surgical device or borrow the money to purchase it?

32. Debt capacity. Exton Hospital is considering a new replacement hospital and plans to issue long-term bonds to finance the project. Before it meets with its investment bankers, the hospital wants to estimate how much additional debt it can take on. Currently, the hospital has annual debt service payments of $2 million, and its cash flow available to meet debt service payment is 10 million per year. For its new debt issuance, the hospital plan to issue fixed-rate debt for thirty years. It also assumes that Fitch Rating Agency will assign it a BBB rating. Fitch's median debt service coverage ratio for BBB bonds is 3.0X. The expected fixed interest rate for a thirty-year BBB rate tax-exempt bond is 5 percent. Using Fitch's median debt service coverage ratio for a BBB-rated bond along with the prior information, how much additional debt could Exton Hospital take on?

Solution Summary

The Boston Common Community Hospital's tax-exempt bonds are discussed. Purchase versus lease centers are provided.