# Need help with finance homwork

Chapter 13

1. Seattle Health Plans currently use zero-dept financing. Its operating income (EBIT) IS \$1 million, and it pays taxes at a 40 percent rate. It has \$5 million in assets and because it is all equity financed \$5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8 percent.

1. What impact would the new capital structure have on the firmâ€™s net income, total dollar return to investor, and ROE?

1. Redo the analysis but now assume that the debt financing would cost 15 percent

1. Return to the initial 8 percent interest rate. Now assume the EBIT could be as low as \$500,000 (with a probability of 20 percent) or as high as \$1.5 million (with a probability of 20 percent). There remains a 60 percent chance that EBIT would be \$1 million. Redo the analysis for each level EBIT and find the expected values of the firms not income, total dollar return to investor s and ROE. What lesson about capital structure and risk does this illustration provide?

1. Repeat the analysis required for Part a but now assume that Settle Health Plans is a non-for-profit corporation and pays no taxes. Compare the result with those obtained in Part a.

1. Calculate the after tax cost of debt for the Wallace Clinic, a for- profit  healthcare provider, assuming that the coupon rate set on its debt is 11 percent and its tax rate is

1. 0 percent

1. 20 percent

1. 40 percent

1. St. Vincent Hospital has a target capital structure of 35 percent debt and 65 percent equity. Its cost of equity (fund capital) estimate is 13.5 percent and its cost of tax-exempt debt estimate is 7 percent. What is the hospital corporate cost of capital?

1. Richmond Clinic has obtained the following estimate for its costs of debt and equity at various capital structure:

Percent Debt                After Tax Cost of Debt           Cost of Equity

0%                                                                             16%

20                                   6.6%                                    17

40                                   7.8                                      19

60                                    10.2                                   22

80                                     14.0                                  27

What is the firmâ€™s optimal capital structure? (Hint: calculate its corporate cost of capital at each structure. Also note that data on component cost at alternative capital structure are not reliable in real world situations.

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