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2.5 George and Margaret Wealthy are in the 48 percent tax bracket, considering both federal and state personal taxes. Norman Briggs, the CEO of Community General Hospital, has been aggressively pursuing the couple to contribute $500,000 to the hospital's soon to be built Cancer Care Center. Without the contribution, the Wealthy's taxable income for 2008 would be $2 million. What impact would the contribution have on the wealthy’s 2008 tax bill?


Wealthy's are in a tax bracket of 48%, a$500000 contribution would lower the 2008 tax bill of Wealthy’s by $500000*48%= $240000 plus any state income tax savings.


The housekeeping services department of ruger clinic, a multispecialty practice in Toledo, Ohio has $100,000 in direct costs during 2008. These costs must be allocated to Ruger’s three revenue producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and house lion in total revenues during 2008. To support these clinical activities, the departments used 5,000 hours of housekeeping services.

a) What is the value of cost pool?

The value of cost pool is $100000

b) What is the allocation rate if (1) patient services revenue is used as the cost driver and (2) hours of housekeeping services are used as the cost driver?

1) Allocation rate if hours of housekeeping services are used:

$100000/5000= $20000 per hour of housekeeping services


Sacramento hospital has the following financial data and operational metrics

Number of beds 250

Total inpatient admission 12,250

Total outpatient visits 90,754

Total patient revenues $111,900,050

Outpatient mix 16.2%

Medicare payment percentage (revenues) 28.0%

Average length of stay 5.8 days

Net price per discharge $7,653

Cost per discharge $6,292

a) What is the hospitals profit per discharge?

Net price per discharge-cost per discharge = $7653-$6292= $1361

b) What is the hospital’s total inpatient and total outpatient revenue? (hint apply patient mix metrics to total revenues.)

Out of the total revenues of $111900050, outpatient mix is 16.2%, i.e. $18127808 is the total outpatient revenue whereas, $93772242 is the inpatient revenue.

c) Verify your part b answer for total inpatient revenue using volume and profitability metrics. (hint calculate price per discharge)

Price per discharge: $7653*12250= $93749250

d) What are the hospitals total revenue from Medicare patients?

Total Revenue from Medicare patients: $31332014

e) What is the total number of inpatient days?

Total inpatient days is the number of admission*average length of stay= 12250*5.8 = 71050 days


Seattle health plans currently uses zero debt financing. Its operating profit is $1 million, and it pays taxes at a 40% 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 that bears an interest rate of 8%.

a) What impact would the new capital structure have on the firm's profit, total dollar return to investors, and return on equity?

b) Redo the analysis, but now assume that the debt financing would cost 15%.

c) Repeat the analysis required for Part a, but now assume that seattle health plans is a not for profit corporation and hence pays no taxes. Compare the results with those obtained in part a.


a) With 50% debt levels, the new capital structure will be 50:50, the value of debt will be $5 million @ 8%, so the interest expense will be $0.4 million.

Amount in Millions

Operating Profit: $1

Less: interest expense 0.08

Profit before tax 0.92

Less tax @40% 0.368

PAT 0.552

Return on equity 11.04%

b) Amount in Millions

Operating Profit: $1

Less: interest expense 0.15

Profit before tax 0.85

Less tax @40% 0.34

PAT 0.51

Return on equity 10.2%

c) Amount in Millions

Operating Profit: $1

Less: interest expense 0.08

Profit before tax 0.92

Less tax 0.0

PAT 0.92

Return on equity 18.4%

In part (a) the return to equity shareholders is 11.04% whereas in part c it is 18.4%, this difference in return is due to non inclusion of tax in part c because of non profit organization.


Morningside Nursing home, a not for profit corporation, is estimating its corporate cost of capital. Its tax exempt debt currently requires an interest rate of 6.2% and its target capital structure calls for 60 percent debt financing and 40% equity (fund capital) financing. Its estimated cost of equity is 16.4 percent. What is Morningside's corporate cost of capital?


6.2*0.6+16.4*0.4= 3.72+6.56=10.28%

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