1. Assume that Lexington Hospital has fixed costs of $10 million and a variable cost (per inpatient day) rate of $200. What will the total cost be with a volume of 50,000 patient days?
2. Consider the following data: fixed costs = $10 million, variable cost per inpatient day = $400, and revenue per inpatient day = $1,200. What is the breakeven volume (in patient days)?
3. True or False: An organization with high fixed costs (relative to variable costs) will suffer a greater decrease in profit as volume declines than will an organization with high variable costs (relative to fixed costs).
4. What is the present value of a $100 lump sum to be received in five years if the opportunity cost rate is 10 percent?
5. Oakdale Community Hospital is considering building an ambulatory surgery center. Which of the following opportunity cost rates would be most appropriate for discounting the project's future cash flows?
a. The expected rate of return on a bank CD
b. The expected rate of return on a municipal bond
c. The expected rate of return on the stock of SurgiCare Corporation, a for-profit company that operates a large number of freestanding ambulatory surgery centers
d. The expected rate of return on the stock of Skilled Healthcare Group, a for-profit company that operates a large number of nursing homes and assisted living centers
e. The expected rate of return on Medcath Corporation, a for-profit company that operates a large number of cardiac specialty hospitals
6. Assume that an outstanding seven-year bond has $1,000 par value, a coupon rate of 10 percent, and five years remaining to maturity. If the required rate of return on similar bonds of equal risk is 5 percent, the bond will sell at which of the following?
a. A premium
b. A discount
c. At par value
d. At $500 ($100 annual interest payments x 5 years to maturity)
e. The bond cannot be sold again because it is already outstanding.
8. Which of the following statements is most correct?
a. Diversifiable risk is caused by events unique to a single business.
b. Portfolio risk is caused by events unique to a single business.
c. Adding similar investments to a portfolio reduces risk more than adding randomly chosen investments does.
d. It is impossible to reduce diversifiable risk.
9. Which of the following statements concerning financial risk is false?
a. Generically, financial risk is related to the probability of a return that is less than expected.
b. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will lower risk.
c. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will not affect risk.
d. In the real world, it is not possible to create a riskless portfolio because all investment returns, to a greater or lesser extent, move with the overall economy.
e. Assume you know for certain that an investment will return negative 10 percent. (In other words, the probability of a negative 10 percent return is 100 percent.) Although the expected return is negative, the investment is riskless.
10. The corporate cost of capital provides a benchmark for determining a project's cost of capital. In general, projects that are riskier than average must have a cost of capital that is higher than the corporate cost of capital, while projects that are less risky than average must have a cost of capital that is less than the corporate cost of capital.
This solution includes calculations on discount models, break-even point, present value, NPV, FV, Cost Analysis, Cash Flow, Portfolios, WACC, etc. 10 true/false questions.
Valuation & Rates of Return
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Must use Excel financial functions when possible.
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