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NPV, FV, Cost Analysis, Cash Flow, Portfolios, WACC

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11. How much cash flow did ABC company generate in 2013?

ABC 2013 Income Statement ($ in MM)
Revenue 100
Cost of Goods Sold -60
Gross Profit 40
SG&A expense -15
Depreciation expense -5
Pre-Tax Profit 20
Taxes -8
Net Income 12

ABC 2013 Cash Flow Statement Information
ABC Company purchased an MRI machine for $2mm (assume ABC paid the full purchase price in cash at the time of purchase)
ABC Company raised (borrowed) $3mm
ABC Company sold some unused land it owned for $4mm
Assume there were no other sources or uses of cash during the year.

12. Which of the following companies do you think is healthier? Comment on 4 key line items that may indicate strengths or weaknesses for each company.

Cash Flow Statement ($s in millions) Alpha Gamma
Operating Activities
Net Income -40 15
Depreciation 325 5
Changes in Current Assets -50 -20
Net Cash Provided by (used in) operating activities 235 0

Investing Activities
Capital Expenditures -200 -10
Proceeds from sale of assets 0 200
Net Cash Provided by (used in) investing activities -200 190

Financing Activities
Decrease in Short Term Borrowings -10 -10
Proceeds from issuance of LT Debt 0 0
Proceeds from sale of Common Stock 0 50
Dividends paid -30 0
Net Cash Provided by (used in) financing activities -40 40

Increase/(Decrease) in cash -5 230
Cash at beginning of the year 100 100
Cash at the end of the year 95 330

13. PMB Clinic is a 3-physician Primary Care clinic in Los Angeles. (See financial information below) They have only one source of income: reimbursement from physician visits.

13.1. Classify each expense item as fixed or variable. Briefly describe your rationale for each classification. (2 points)
13.2. What are the variable costs per visit?
13.3. What is the breakeven equation?
13.4. What is the contribution margin on each physician visit?
13.5. How many visits per year must the clinic perform to breakeven?

Physician Visits 12,000
Reimbursement per visit $80
Total Revenue $960,000

Medical Supplies $19,200
Vaccinations/Medications $28,800
Occupancy costs (Rent+maintenance) $50,000
Staff Salaries and benefits (7 staff @ 50k each) $350,000
Physician Salaries (3 MDs @ 150k each) $450,000
Temporary Staff (to help when the office gets busy) $25,000
Malpractice and Liability Insurance $45,000
Total Expenses $968,000

Pre-Tax Profit ($8,000)

14. Dr Maya founded a radiology benefit management company that controls diagnostic imaging costs by influencing physicians to follow evidenced based prescribing guidelines. Dr Maya invested $2mm on 1/1/13 to start the company. By 1/1/14 the company was generating profits of $2mm per year, and Dr Maya was investing all the profits back into the business. During 2014, Dr Maya decides she should raise $10mm to expand her business. She explores debt and equity financing, and as part of that exploration process she compiles the following 4-yr projections:
• Upside scenario: Sell for $90mm.
• Base Case scenario: Sell for $60mm.
• Downside Scenario: Sell for $5mm.

Assume an outside investment is made on 1/1/15, and the eventual sale of the company occurs on 1/1/19 (4 yrs after the outside investment). Dr Maya receives the following term sheet proposals:
• Proposal #1: Equity investment from HLR Capital. $10mm investment for 25% ownership.
• Proposal #2: Term loan from a local bank. $10mm investment, 8% interest rate, 4 year term. (Assume the debt is a zero-coupon loan that pays back all interest and principal at maturity. Assume interest is compounded annually.)

14.1. What is the future value (at maturity) of the debt in Proposal #2?

14.2. Calculate the cost of financing for each of the proposals, in each of the 3 scenarios (6 points)

Cost of financing: Debt Equity
Upside scenario
Base Case scenario
Downside scenario

14.3. Calculate the payout to Dr. Maya for each proposal in each of the 3 scenarios (3 points)
Payout for Dr Maya Debt Equity
Upside scenario
Base Case scenario
Downside scenario

14.4. For each scenario, calculate Dr. Maya's IRR on her initial $2mm investment (3 points)
IRR for Dr Maya Debt Equity
Upside scenario
Base Case scenario
Downside scenario

14.5. If you were Dr Maya, which proposal would you choose and why? (4 points)

15. Acme Delivery Systems (ADS) is an integrated healthcare delivery system. Currently ADS contracts with the community to provide MRI scans and they are looking at bringing the service in-house. They expect to provide 2000 scans next year with an annual volume increase of 10% per annum. Currently they have a contract with an outside provider which will cost $700 per scan next year (Year 1) and the price will increase at 5% per annum (MRIs in year 2 under contract cost 5% more than year 1 and so forth).
Alternatively ADS can purchase an MRI at a total installed cost of $4,000,000. The MRI has a useful life of 10 years and is depreciated on a straight-line basis. You have been asked to do an analysis of whether ADS, a for profit company, should purchase the MRI or continue contracting out to the community. Doing research into the project you have used the following information:
a) The balance sheet - see attachment
b) The template for projected P&L of the MRI - see attachment
c) ADS just paid a dividend of $2.00 per share and it is expected to exhibit a constant growth rate of 5% per annum.
d) The Risk Free Rate is 6%
e) The Market Risk Premium is 6%
f) ADS beta is 1.6
g) The MRI's Beta in relation to ADS overall portfolio of projects is .8 as it is less risky than the average risk of the portfolio of projects
h) ADS current tax rate is 30%
i) ADS issued senior 20 Year debt 5 Years ago at a coupon rate of 7%
j) The current market required rate for debt of similar risk and time to maturity is 5%

15.1 What is the expected rate of return for equity holders?
15.2 What is the current price of an ADS share of stock?
15.3 What is the current price of ADS bonds?
15.4 What is the Weighted Average Cost of Capital for ADS?
15.5 Should ADS buy the MRI or contract for it in the community? (Note: Ignore quality/service considerations. Just compare the incremental costs of the two alternatives.)

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See the attached files.

11. How much cash flow did ABC company generate in 2013?

ABC 2013 Income Statement ($ in MM)
Revenue 100
Cost of Goods Sold -60
Gross Profit 40
SG&A expense -15
Depreciation expense -5
Pre-Tax Profit 20
Taxes -8
Net Income 12

ABC 2013 Cash Flow Statement Information
ABC Company purchased an MRI machine for $2mm (assume ABC paid the full purchase price in cash at the time of purchase)
ABC Company raised (borrowed) $3mm
ABC Company sold some unused land it owned for $4mm
Assume there were no other sources or uses of cash during the year.

12. Which of the following companies do you think is healthier? Comment on 4 key line items that may indicate strengths or weaknesses for each company.

Cash Flow Statement ($s in millions) Alpha Gamma
Operating Activities
Net Income -40 15
Depreciation 325 5
Changes in Current Assets -50 -20
Net Cash Provided by (used in) operating activities 235 0

Investing Activities
Capital Expenditures -200 -10
Proceeds from sale of assets 0 200
Net Cash Provided by (used in) investing activities -200 190

Financing Activities
Decrease in Short Term Borrowings -10 -10
Proceeds from issuance of LT Debt 0 0
Proceeds from sale of Common Stock 0 50
Dividends paid -30 0
Net Cash Provided by (used in) financing activities -40 40

Increase/(Decrease) in cash -5 230
Cash at beginning of the year 100 100
Cash at the end of the year 95 330

13. PMB Clinic is a 3-physician Primary Care clinic in Los Angeles. (See financial information below) They have ...

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Solution helps in computing NPV, FV, Cost Analysis, Cash Flow, Portfolios, WACC.

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Financial questions relating to Business Organization, Shareholders' wealth, Cash flow statement, financial ratios, time value of money, CAPM, Bonds, payback, NPV, IRR, IOS and MCC schedule, WACC, Leverage, EBIT-EPS approach, Cash Conversion cycle.

1) Explain the three principal forms of business organization. Outline their respective advantages and disadvantages. How do taxes, risk, scale, and ownership liquidity affect the selection of one of these three methods?

2) Compare the shareholder-wealth-maximization model with the corporate-wealth- maximization model. What is the proxy for shareholder wealth? How does the role of the shareholder conflict with that of other stakeholder? Who are some of the stakeholder and give examples of potential conflicts. Additionally, what is meant by the agency problem, why does it arise, and what may be done to address it?

3) Discuss the three components of a cash flow statement. What is another name for the statement of cash flows and why is the cash flow statement important? How is the statement of cash flows similar or different from a cash budget?

4) Outline the five classes of financial ratios (you do not need to give the formulas). What are the advantages and disadvantage to using ratio analysis? What do you need to be mindful of when doing ratio analysis? What is the DuPont ratio, what are its components, and why is it important?

5) Time value of money

a) What is the difference between compounding and discounting?

b) What are the five variables in a time value calculation?

c) What is the difference between an annuity and a mixed cash flow?

d) What is the difference between an ordinary annuity and an annuity due? Which has a greater future value and why?

e) Give examples where you may use time value in your own life.

6) How do you measure the return and total risk for a single asset? What is the difference between portfolio risk and stand alone risk? What is the difference between systematic risk and unique risk? What is the tradeoff between risk and return? How does risk change (absolutely and incrementally) as you randomly add assets to a portfolio? What effect does
the risk of a single asset and the correlation between assets in a portfolio have on portfolio risk?

7) What is the capital asset pricing model (CAPM); what does it show; why is it important: and how do you use it? What are some of the practical and theoretical limitations of the CAPM?

8) Describe and compare the zero-growth, constant-growth, and multi-stage dividend growth models for equity valuation. What assumptions must you make? How do changes in the growth rate and the cost of capital affect valuation?

11) Bonds

a) Using a bond price yield curve, discuss in detail the relationship between bond prices and the yield to maturity.

b) How do maturity and the size of the coupon affect the shape of the bond price yield curve? Explain. What does the shape of the bond price yield curve mean for interest rate risk?

c) Assuming no change in interest rates, what happens to the price of a bond as it approaches maturity? Show this graphically for a par, premium, and discount bond.

d) If you expect interest rates to rise (decline), what kind of bond should you buy? Why?

12) Compare and contrast the payback, NPV and IRR techniques for capital budgeting. What are their respective advantages and disadvantages of each? Will they ever give you different recommendations? If so, which would you prefer and why?

13) Draw and label an NPV profile? What does the profile show? How can you use it to assess an individual project or multiple projects? What factor(s) explains the shape of the NPV profile? What other curve does it resemble?

14) Explain the IOS and MCC schedules. What are they; how are they computed; and how can you use them? What is a break point? Use a graph to illustrate your work. Carefully label this graph.

15) Describe and discuss the following terms. Be sure to include where/why they are important and/or how you can use them.

a) Risk adjusted return

b) Annualized net present value

c) Scenario analysis

d) Sensitivity analysis

e) Capital rationing

16) Discuss the weighted average cost of capital: what is it, how do you compute it, why it is important, and what it does it mean for new projects. Is the weighted average cost of capital constant over time? Why or why not?

What are the different ways to determine the weights? Why do some firms use a hurdle rate that is higher than the WACC? What are the implications of using a higher hurdle rate to shareholder wealth maximization?

17) Define operating, financial and total leverage as well as the degree of operating, financial, and total leverage. How do you use them and why are they important? Is the degree of operating, financial, and total leverage constant? Explain why or why not. How do operating and financial leverage affect a company's target capital structure and earnings per share? How and why do businesses adjust for the tradeoff between financial and operating
leverage?

18) Conceptually and graphically discuss how you would determine the optimal capital structure for a specific firm. Include a discussion of the EBIT-EPS approach.

19) Describe the cash conversion cycle, its funding requirements, and the strategies for managing it.

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