Questions and Answers of Introduction To Accounting

Assume that you have been asked to place a value on the fund capital(equity) of BestHealth, a not-for-profit HMO. Its projected profit and loss statements and equity reinvestment (asset) requirements
One asset management ratio, the inventory turnover ratio, is defined as sales (i.e., revenues) divided by inventories. Why would this ratio be more important for a medical device manufacturer or a
a. Assume that Beverly Enterprises and Manor Care, two operators of nursing homes, have fiscal years that end at different times—say, one in June and one in December. Would this fact cause any
a. What is the difference between MVA and EVA?b. Are both measures applicable to not-for-profit businesses? Explain your answer.
Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long-term care facilitya. Perform a Du Pont analysis on Green Valley. Assume that the industry average
Examine the industry average ratios given in Problems 17.4 and 17.5 above. Explain why the ratios are different between the managed care and nursing home industries?
What is the difference between an operating lease and a financial lease? (Lo1)
What is a sale and leaseback? ( Lo3)
What is the difference between a tax-oriented (guideline) lease and a non-tax-oriented lease? (Lo2)
Why should the IRScare about lease provisions? (Lo3)
What is a tax-exempt lease? (Lo4)
Why is lease financing sometimes called off-balance sheet financing? (Lo5)
How are leases accounted for on a business’s balance sheet? (Lo6)
Explain how the cash flows are structured in conducting a dollar cost(NAL) analysis.(Lo6)
What discount rate should be used when lessees perform lease analyses? (Lo7)
What is the economic interpretation of the net advantage to leasing? (Lo8)
What is the economic interpretation of a lease’s IRR?(Lo9)
What are some economic factors that motivate leasing—that is, what asymmetries might exist that make leasing beneficial to both lessors and lessees? (Lo10)
Would it ever make sense to lease an asset that has a negative NAL when evaluated by a conventional lease analysis? Explain your answer. (Lo11)
Briefly describe two approaches commonly used to value businesses. (Lo12)
What are some problems that occur in the valuation process? (Lo13)
Which approach do you believe to be best? Explain your answer. (Lo14)
Distinguish between operating and financial leases. Would you be more likely to use an operating lease to finance a piece of diagnostic equipment or a hospital building? p1
Leasing companies often promote the following two benefits of leasing.Critique the merits of each hypothesized benefit.a. Leasing preserves a business’s liquidity because it avoids the large cash
Assume that there were no IRSrestrictions on what type of transaction could qualify as a lease for tax purposes. Explain why some restrictions should be imposed. p3
In the Nashville Radiology Group example given in the chapter, we assumed that the lease did not have a cancellation clause. What effect would a cancellation clause have on the analysis? p4
Discuss some of the asymmetries that drive lease transactions.
Describe the mechanics of the discounted cash flow (DCF) approach to business valuation. p5
Describe the mechanics of the market multiple approach to business valuation. p6
Which approach do you think is best for valuing a business: the DCF approach or the market multiple approach? Explain the rationale behind your answer. p7
University Health System has three divisions: Real Estate, with an 8 percent cost of capital; Health Services, with a 10 percent cost of capital; and Managed Care, with a 12 percent cost of capital.
Why may a focus on operating revenue be preferable to a focus on total revenue?
What is Market Value Added (MVA), and how is it measured?
Can MVA and EVA be applied to not-for-profit firms?
Why is EVA a better measure of financial performance than are accounting measures such as net income or earnings per share?
Might financial value creation be an appropriate goal for not-for-profit businesses? Explain.
What is the difference between financial and operating indicator analyses?
Describe four indicators commonly used in operating indicator analysis.
Richmond Clinic has obtained the following estimates for its costs of debt and equity at various capital structures:What is the firm’s optimal capital structure? (Hint: Calculate its corporate cost
Winston Clinic is evaluating a project that costs $52,125 and has expected net cash inflows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the
What is the advantage of classifying capital projects?
Great Lakes Clinic has been asked to provide exclusive healthcare services for next years’ World Exposition. Although flattered by the request, the clinic’s managers want to conduct a financial
What is the role of financial analysis in capital budgeting decision making within for-profit firms?
Explain the five steps in capital budgeting financial analysis.
Describe the net present social value (NPSV) model of capital budgeting.
Should capital budgeting analyses look at only one breakeven or profitability measure? Explain your answer.
Is it necessary to include depreciation expense in a cash flow analysis by a not-for-profit provider? Explain your answer.
What is payback?
Briefly describe how to calculate net present value (NPV) and internal rate of return (IRR).
Do the two methods lead to the same conclusions regarding project profitability? Explain your answer.
Describe how a qualitative approach can be used to assess project risk.
Should all subsidiaries of a firm use the firm’s corporate cost of capital as the benchmark rate in making capital budgeting decisions?
How might a business go about estimating its subsidiary costs of capital?
What is the goal of short-term financial management?
What two key issues does current asset policy involve?
What factors influence the current asset investment decision?
What is meant by the term permanent assets?
Riverside Memorial’s financial statements are presented in Tables 17.1, 17.2, and 17.3.a. Calculate Riverside’s financial ratios for 2003. Assume that Riverside had $1,000,000 in lease payments
What is meant by the term temporary assets?
What factors influence the current asset financing decision?
What is float?
Here are the 2004 revenues for the Wendover Group Practice Association for four different budgets, in thousands of dollars:a. What does the budget data tell you about the nature of Wendover’s
Draw a three-year time line that illustrates the following situation: An investment of $10,000 at Time 0; inflows of $5,000 at the end of Years 1, 2, and 3; and an interest rate of 10 percent during
What is compounding? What is interest on interest?
What are three solution techniques for solving lump sum compounding problems?
What is meant by discounting at work?
What are a few real-world situations that may require you to solve for interest rate or time?
Can financial calculators and spreadsheets easily solve for interest rate or time?
Describe how present values of uneven cash flow streams are calculated using a regular calculator, using a financial calculator, and using a spreadsheet.
Great Lakes Health Network’s net income increased from $3.2 million in 1994 to $6.4 million in 2004. The total growth rate over the ten years is 100 percent, while the annual growth rate is only
Explain the concept of investment return and the two different approaches to measuring return
Consider another uneven cash flow stream:a. 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
Consider the following investment cash flows:a. What is the return expected on this investment measured in dollar terms if the opportunity cost rate is 10 percent?b. Provide an explanation, in
Epitome Healthcare has just borrowed $1,000,000 on a five-year, annual payment term loan at a 15 percent rate. The first payment is due one year from now. Construct the amortization schedule for this
Assume that $10,000 was invested in the stock of General Medical Corporation with the intention of selling after one year. The stock pays no dividends, so the entire return will be based on the price
What are the two complications that arise when dealing with financial risk in a business setting?
What does the term risk aversion mean?
What is stand-alone risk?
Define and explain two measures of stand-alone risk?
What is a well-diversified portfolio?
Why should all investors hold portfolios rather than individual assets?
Is standard deviation the appropriate risk measure for an investor’s portfolio of assets?
How is portfolio risk measured?
What is a corporate beta, and how is it estimated?
Briefly, what is the difference between corporate risk and market risk?
What is the difference between a project’s market beta and the firm’s market beta?
What is the value of the weighted average of all project corporate betas within a business?
Explain the situations in which each of the risk types—stand-alone, corporate, and market risk—are relevant.
Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound machine:a. What is the expected rate of return on the project?b. What is the
Refer to Table 10.2.a. Construct an equal-weighted (50/50) portfolio of Investments B and C. What is the expected rate of return and standard deviation of the portfolio. Explain your results.b.
Suppose that the risk-free rate, RF, were 8 percent and the required rate of return on the market, R(RM), were 14 percent.a. Write out the Security Market Line (SML), and explain each term.b. Plot
A few years ago, the Value Line Investment Survey reported the following market betas for the stocks of selected healthcare providers:At the time these betas were developed, reasonable estimates for
Assume that HCA is evaluating the feasibility of building a new hospital in an area not currently served by the company. The company’s analysts estimate a market beta for the hospital project of
Describe the primary features of the following long-term debt securities:• Term loan• Bond• First mortgage bond• Junior mortgage• Debenture• Subordinated debenture• Municipal bond
Describe the following debt contract features:• Bond indenture• Restrictive covenant• Trustee• Call provision
What impact do bond ratings have on the cost of debt to the issuing firm?
Write out an equation for the required interest rate on a debt security.
Do the interest rates on Treasury securities include a default risk premium? A liquidity premium? A price risk premium? Explain your answer.
What is price risk? What type of debt securities would have the largest price risk premium?
What is meant by a bond’s yield to maturity (YTM)? Its yield to call (YTC)?

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