September – December 2023 Re: Finance Assignment

Business & Finance

PROBLEM 1Find the following values for a lump sum:- The future value of $500 invested at 8 percent for one year- The future value of $500 invested at 8 percent for five years- The present value of $500 to be received in one year when the opportunity cost rate is 8 percent- The present value of $500 to be received in five years when the opportunity cost rate is 8 percentassuming:a. Annual compoundingb. Semiannual compoundingc. Quarterly compoundingPROBLEM 2What is the effective annual rate (EAR) if the stated rate is 8 percent and compounding occur semiannually? Quarterly?ANSWERPROBLEM 3Find the following values assuming a regular, or ordinary, annuity:- The present value of $400 per year for ten years at 10 percent- The future value of $400 per year for ten years at 10 percent- The present value of $200 per year for five years at 5 percent- The future value of $200 per year for five years at 5 percentassuming:a. A regular or ordinary annuityb. An annuity dueANSWERPROBLEM 4Consider the following uneven cash flow stream:Year Cash Flow0 $01 $2502 $4003 $5004 $6005 $600a. What is the present (Year 0) value if the opportunity cost (discount) rate is 10 percent?b. Add an outflow (or cost) of $1,000 at Year 0. What is the present value (or net present value) of thestream?ANSWERPROBLEM 5Consider another uneven cash flow stream:Year Cash Flow0 $2,0001 $2,0002 $03 $1,5004 $2,5005 $4,000a. What is the present (Year 0) value of the cash flow stream if the opportunity cost rate is 10 percent?b. What is the value of the cash flow stream at the end of Year 5 if the cash flows are invested in anaccount that pays 10 percent annually?c. What cash flow today (Year 0), in lieu of the $2,000 cash flow, would be needed to accumulate $20,000at the end of Year 5? (Assume that the cash flows for Years 1 through 5 remain the same.)d. Time value analysis involves either discounting or compounding cash flows. Many healthcare financialmanagement decisions—such as bond refunding, capital investment, and lease versus buy—involvediscounting projected future cash flows. What factors must executives consider when choosing adiscount rate to apply to forecasted cash flows?ANSWERPROBLEM 6What is the present value of a perpetuity of $100 per year if the appropriate discount rate is 7 percent?Suppose that interest rates doubled in the economy and the appropriate discount rate is now 14 percent.What would happen to the present value of the perpetuity?ANSWERPROBLEM 7An investment that you are considering promises to pay $2,000 semiannually for the next two years,beginning six months from now. You have determined that the appropriate opportunity cost (discount)rate is 8 percent, compounded quarterly. What is the present value of this investment?ANSWERPROBLEM 8Consider the following investment cash flows:Year Cash Flow0 -$1,0001 $2502 $4003 $5004 $6005 $600a. What is the return expected on this investment measured in dollar terms if the opportunity cost rate is10 percent?b. Provide an explanation, in economic terms, of your answer.c. What is the return on this investment measured in percentage terms?d. Should this investment be made? Explain your answer.ANSWERPROBLEM 9Epitome Healthcare has just borrowed $1,000,000 on a five-year, annual payment term loan at a 15percent rate. The first payment is due one year from now. Construct the amortization schedule for thisloan.ANSWERChapter 5PROBLEM 1Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound machine:State of the Probability Rate ofeconomy of occurrence returnVery poor 0.1 -10%Poor 0.2 0%Average 0.4 10%Good 0.2 20%Very good 0.1 30%a. What is the expected rate of return on the project?b. What is the project’s standard deviation of returns?c. What is the project’s coefficient of variation (CV) of returns?d. What type of risk does the standard deviation and CV measure?e. In what situation is this risk relevant?ANSWERPROBLEM 5A few years ago, the Value Line Investment Survey reported the following market betas for the stocks ofselected healthcare providers:Company BetaQuorum Health Group 0.90Beverly Enterprises 1.20HEALTHSOUTH Corporation 1.45United Healthcare 1.70At the time these betas were developed, reasonable estimates for the risk-free rate, RF, and the required rate of return on the market, R(Rm), were 6.5 percent and 13.5 percent, respectively.a. What are the required rates of return on the four stocks?b. Why do their required rates of return differ?c. Suppose that a person is planning to invest in only one stock rather than hold a well-diversified stockportfolio. Are the required rates of return calculated above applicable to the investment? Explain youranswer.ANSWER

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