18.1

Suncoast Healthcare is planning to acquire a new X-ray machine that costs $200,000. The business can either lease the machine using an operating lease or buy it using a loan from a local bank. Suncoast’s balance sheet prior to acquiring the machine is a follows:

current assets-$100,000–Debt- $400,000

Net fixed assets–900,000-Equity-$600,000

Total assets-$1,000,000- Total claims-$1,000,000

a. What is Suncoast’s current debt ratio?

b. What would the new debt ratio be if the machine were leased? If it is purchased?

c. Is the financial risk of the business different under the two acquisition alternatives?

18.2

Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four year useful life. It can obtin bank loan for the entire amount and buy the MRI, or it can lease the equipment. Assume that the following facts apply to the decision:

The MRI falls into the three year class for tax depreciation, so the MACRS allowances are .33, .45, .15, and .07 in years 1 through 4, respectively.

Estimated maintenance expenses are $75,000 payable at the beginning of each year whether the MRI is leased or purchased.

Big Sky’s marginal tax rate is 40percent.

The bank loan would have an interest rate of 15 percent.

If leased the lease (rental) payments would be $400,000 pyable at the end of eaach of the next four years

The estimated residual (and salvage) value is $250,000.

a. What are the NAL and IRR of the lease? Interpret each value.

b.Assume now that thesalvage value estimate is $300,000 but all other facts remain the same. What is the new NAL? The new IRR?

18.3

HealthPlan Northwest must install a new $1 million computer to track patient records in its three service areas. It plans to use the computer for only three years, at which time a brand new system will be acquired that will handle both billing and patient records. The company can obtain a 10 percent bank loan to buy the computer or it can lease the computer for three years. Assume that the following facts apply to the decision:

The computer falls into the three year class for tax depreciation so the MACRS allowances are .33, .45, .15, and .07 in years 1 through 4, respectively.

The company’s marginal tax rate is 34 percent.

Tentative lease terms call for payments of $320,000 at the end of each year.

The best estimate for the value of the computer after three years of wear and tear is$200,000.

a. What are the NAL and IRR of the lease? Interpret each value.

b. Assume now that the bank loan would cost 15 percent, but all other facts remain the smae. What is the NAL? The new IRR?

18.4

Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profit and loss statements and equity reinvestment (asset) requirements are as follows (in millions):

– 2012-2013-2014-2015-2016

net revenues—-$225.–240.0-250.-260.0-275.0

Cash expense-200.0–205.0-210.0-215.0-225.0

Depreciation -11.0—12.0–13.0—-14.0–15.0-

(EBIT)—–14.0——-23.0—–27.0—-31.0–35.0

Interest——-8.0——-9.0——9.0—–10.0–10.0

(EBT)——6.0———-14.0——18.0—-21.0–25.0

Tax (40%)-2.4——–5.6——–7.2——8.4—10.0

Net profit—-$3.6—–8.4——-10.8—–12.6–15.0

Assets req.–$6.0—6.0——-6.0——-6.0—-6.0

Briarwood’s cost of equity is 16 percent. The best estimate for Briarwood’s long term growth rate is 4 percent.

a. what is the equuity value of the hospital?

b. Suppose that the expected long term growth rate was 6 percent. What impact would this change have on the equity valure of the business? What if the growth rate were only 2 percent?