HSL 651 Week 5 Assignment
Grade: ___ / 124 points x 100 = ____
Problem #1. Loan Amortization: 24 points
Required
Compute the first six months of a loan amortization schedule with a principal balance of $60,000, an interest rate of ten percent, and a payment period of three years or thirty-six months. Use an online loan calculator to do this problem. There are a number of them out there that can be found with a simple Google search. Please give the URL for the online loan calculator used.
Loan Amortization Schedule
Principal borrowed: $60,000
Total payments: 36
Annual interest rate 10.00% (monthly rate = 0.8333%)
Payment #
Total Payment
Principal Portion of Payment
Interest Expense Portion of Payment
Remaining Principal Balance
Beginning balance =
$60,000.00
1
2
3
4
5
6
Problem #2. Financial Statement Capital Structures: 30 points
Find financial statements for three different healthcare organizations that have varying capital structures. Write a brief paragraph about each that explains the debt–equity relationship, and compute the debt-equity ratio, the percent of debt, and the percent of equity represented. Also note whether the percent of annual interest on debt is revealed in the notes to the financial statements. If so, do you believe the interest rate is fair and equitable? Why?
To locate these statements, you may wish to review the Wall Street Journal stock exchange listings to find publicly held healthcare corporations. Use the most recent annual report. You might also go to the Web and find the annual reports of private and publicly held healthcare entities. Once at the organization’s home page, the most recent annual report should be prominently listed on the menu. Healthcare organizations you may wish to research include hospital systems, nursing home chains, pharmaceutical companies, device manufacturers, electronic health record manufacturers, retail pharmacies, etc.
You should be able to find the total liabilities and total shareholders’ equity on the annual report’s balance sheet, and then should be able to compute what percentage of that total is applicable to liabilities and to equity. You should compute and report the debt-to-equity ratio for each organization using the following formula:
Debt-to-Equity Ratio = Total Liabilities / Total Shareholders’ Equity
In your assessment, explain whether the debt-to-equity ratio is good or indicates risk To help you with this interpretation, please read the following brief article Debt-to-Equity (D/E) Ratio Definition & Formula (investopedia.com)
With regard to the percent of annual interest on debt, the current prime rate (again using the Wall Street Journal as a source) may serve as a benchmark.
For each organization, please include the URL for your source of information.
Note: As you review financial statements for healthcare companies in the Wall Street Journal or other sources, pay CLOSE attention to the comment in the statement headings as to how many dollars are being represented in the various statement entries. For example, you may find a TOTAL ACCOUNTS RECEIVABLE that is $18,738, but if you look at the heading, you will see “All values USD millions”. This means that the amount of Total Accounts Receivable is actually $18,738,000,000 (or, $18.738 billion). The reason statements are set up this way is that it takes up a lot of space in the statements to put in all of those zeros, so they are left out and the comment is put in as a key to interpreting the actual amounts.
So, if the statement says “All values USD millions”, you have to add six zeros to the number that you are telling about in your answer. If the statement says “In thousands”, you have to add three zeros to the number you are reporting.
Problem #3. Cost of Owning and Cost of Leasing: 55 points
Cost of owning and cost of leasing tables are reproduced below.
Using the Present Value of $1.00 table from Chapter 13 Appendix A (p. 141), record the present value factor at 10% for each year and compute the present value cost of owning and the present value of leasing. Which alternative is more desirable at this interest rate and why?
Cost of Owning—Anywhere Clinic—Comparative Present Value
For-Profit Cost of Owning:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash Flow
(48,750)
2,500
2,500
2,500
2,500
5,000
Present value factor: 10%
Present value answers
Present value cost of
owning =
Cost of Leasing—Anywhere Clinic—Comparative Present Value
For-Profit Cost of Leasing:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash Flow
(8,250)
(8,250)
(8,250)
(8,250)
(8,250)
—
Present value factor: 10%
—
Present value answers
Present value cost of leasing =
Next, record the present value factor at 6% for each year and compute the present value cost of owning and the present value of leasing. Which alternative is more desirable at this interest rate and why?
Cost of Owning—Anywhere Clinic—Comparative Present Value
For-Profit Cost of Owning:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash Flow
(48,750)
2,500
2,500
2,500
2,500
5,000
Present value factor: 6%
Present value answers
Present value cost of
owning =
Cost of Leasing—Anywhere Clinic—Comparative Present Value
For-Profit Cost of Leasing:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash Flow
(8,250)
(8,250)
(8,250)
(8,250)
(8,250)
—
Present value factor: 6%
—
Present value answers
Present value cost of leasing =
Use a brief paragraph of 2-4 sentences to explain what this exercise tells you about owning vs. leasing at the two different interest rates.
Problem #4. Owning vs. Leasing: 15 points
Metropolis Health System has to do something about their ambulance situation. They have to (a) buy a new ambulance; (b) lease a new one; or (c) renovate an existing ambulance that MHS already owns. Rob Lackey, the Assistant Controller, has been asked to gather pertinent information in order to make a decision. So far Rob has found these facts:
1) It will cost at least $250,000 to purchase a new ambulance, although the cost varies widely depending upon the amount of the emergency equipment contained on the vehicle.
2) In order to renovate the existing vehicle, it will cost at least $100,000 to purchase and install a new “box.” (In other words, a new emergency-equipped body is installed on the existing chassis.) Rob has found this existing ambulance has an odometer reading of 80,000 miles. The vehicle will also need a new fuel pump and new tires, but he believes these items would be recorded as repair and maintenance operating expenses and thus would not be included in his calculations.
3) Lease terms for ambulances also vary widely, but so far Rob believes a cost of $60,000 per year is a ballpark figure.
Required
How much more information should Rob have before he begins to make any calculations? Make a list. Which alternative do you believe would be best? Give your reasons. Responses should be 1-2 paragraphs in length.
2
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