Case 6.2: Big Valley Hospital Key concept: Bond issuance valuation and bond interest expense ande 8od he board of directors and CEO of Big Valley Hospital have authorized temporary financing of a major hospital expansion by selling $10 million of three-year term bonds with a coupon (stated) interest rate of 3 percent. Interest is payable annually. The CFO prepared the following principal and interest repayment table for the board's information: End of Year o End of Year 1 End of Year 2 End of Year 3 Totals $10,000,000 Bond face amount Yearly interest $300,000 $300,000 $300,000 $900,000 Principal $10,000,000 $10,000,000 repayment $10,900,000 Total payments The CFO informed the board that, due to Big Valley Hospital's AAA credit rating, the market rate of interest at the date of bond issuance would only be 2 percent. inVais lh Questions 1. How much cash will Big Valley Hospital get from issuing the bonds? (Ignore issu- ance costs.) 2. What will be the amount of Year 1 interest expense in the financial statements for the bonds? pao cott 3. What journal entry would be required to record interest expense for Year 1 Case 7.1: North Bend Hospital 2u L e Key concept: Parsimonious forecasting of free cash flows Orth Bend Hospital (NBH) is a profitable, rapidly growing hospital system in the Pacific Northwest. Part of its growth strategy is to purchase physician prac tices and integrate them into the NBH system while retaining the physicians as employees. The CFO has entered into purchase discussions with Rogue River Medical Asso- ciates (RRMA), a physician practice employing 15 physicians with various specialties. RRMA reported fiscal year 2015 revenues of $4,000,000, with a net operating profit margin of $500,000. Its December 31, 2015, financial statements revealed that net oper- ating assets totaled $600,000 and debt totaled $400,000. The CFO of NBH estimates that RRMA revenue will grow at a rate of 10 percent for the next three years and then slow to a long-term growth rate of 3 percent. per year He thinks that physician compensation agreements will maintain a stable net operating profit margin and that the current margin will be able to be maintained indefinitely. Net assets are expected to grow at 5 percent per year for three years and then slow operating to 2 percent indefinitely The NBH current historical cost of capital is 10 percent, but the CFO has been using a 12 percent hurdle rate for capital investments. RRMA has suggested that it would accept a purchase offer of $4 million. RRMA is willing to take a $500,000 initial payment, with the balance paid at the rate of $500,000 per year (payment includes implicit interest at 5 percent) until the purchase price is paid. etho o'l Assignment and Questions 1. Forecast the free cash flows for Rogue River Medical Associates 2 ACY 2 2. Are these cash flows sufficient to make the payments on the purchase price? 3. What should the CFO do? Case 6.2: Big Valley Hospital Key concept: Bond issuance valuation and bond interest expense ande 8od he board of directors and CEO of Big Valley Hospital have authorized temporary financing of a major hospital expansion by selling $10 million of three-year term bonds with a coupon (stated) interest rate of 3 percent. Interest is payable annually. The CFO prepared the following principal and interest repayment table for the board's information: End of Year o End of Year 1 End of Year 2 End of Year 3 Totals $10,000,000 Bond face amount Yearly interest $300,000 $300,000 $300,000 $900,000 Principal $10,000,000 $10,000,000 repayment $10,900,000 Total payments The CFO informed the board that, due to Big Valley Hospital's AAA credit rating, the market rate of interest at the date of bond issuance would only be 2 percent. inVais lh Questions 1. How much cash will Big Valley Hospital get from issuing the bonds? (Ignore issu- ance costs.) 2. What will be the amount of Year 1 interest expense in the financial statements for the bonds? pao cott 3. What journal entry would be required to record interest expense for Year 1 Case 7.1: North Bend Hospital 2u L e Key concept: Parsimonious forecasting of free cash flows Orth Bend Hospital (NBH) is a profitable, rapidly growing hospital system in the Pacific Northwest. Part of its growth strategy is to purchase physician prac tices and integrate them into the NBH system while retaining the physicians as employees. The CFO has entered into purchase discussions with Rogue River Medical Asso- ciates (RRMA), a physician practice employing 15 physicians with various specialties. RRMA reported fiscal year 2015 revenues of $4,000,000, with a net operating profit margin of $500,000. Its December 31, 2015, financial statements revealed that net oper- ating assets totaled $600,000 and debt totaled $400,000. The CFO of NBH estimates that RRMA revenue will grow at a rate of 10 percent for the next three years and then slow to a long-term growth rate of 3 percent. per year He thinks that physician compensation agreements will maintain a stable net operating profit margin and that the current margin will be able to be maintained indefinitely. Net assets are expected to grow at 5 percent per year for three years and then slow operating to 2 percent indefinitely The NBH current historical cost of capital is 10 percent, but the CFO has been using a 12 percent hurdle rate for capital investments. RRMA has suggested that it would accept a purchase offer of $4 million. RRMA is willing to take a $500,000 initial payment, with the balance paid at the rate of $500,000 per year (payment includes implicit interest at 5 percent) until the purchase price is paid. etho o'l Assignment and Questions 1. Forecast the free cash flows for Rogue River Medical Associates 2 ACY 2 2. Are these cash flows sufficient to make the payments on the purchase price? 3. What should the CFO do