OPLOS case 6.2: Big Valley Hospital oncept: Bond issuance valuation and bond interest expense Key concept: Bol 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 Bond face $10,000,000 amount $300,000 $300,000 $300,000 $900,000 Yearly interest $10,000,000 $10,000,000 Principal 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. Questions bonds? (Ignore isso. 1. How much cash will Big Valley Hosp will Rig Valley Hospital get from issuing the bond. ance costs.) ancial statements for 2. What will be the amount of Year I interest expense in the financial s the bonds? 3. What journal entry would be required to record interest expense for Year Case 7.1: Nor Key concept: Parsima 7.1: North Bend Hospitale sept: Parsimonious forecasting of free cash flows orth Bend Hospital (NBH) is a profitable, rapidly growing hospital syste the Pacific Northwest. Part of its growth strategi Tart of its growth strategy is to purchase physician prac- tices and integrate them into the NBH sve em into the NBH system while retaining the physicians as employees. ciates (RRMA) RRMA reported fisca margin of $500 ating assets totaled CFO has entered into purchase discussions with Rogue River Medical na (RRMA), a physician practice employing 15 physicians with various specialties. A reported fiscal year 2015 revenues of $4,000,000, with a net operating profit f $500,000. Its December 31, 2015, financial statements revealed that net oper ssets totaled $600,000 and debt totaled $400,000. CFO of NBH estimates that RRMA revenue will grow at a rate of 10 perc er for the next three years and then slow to a long-term growth rate of 3 percent. thinks that physician compensation agreements will maintain a stable net operating margin and that the current margin will be able to be maintained indefinitely. ating assets are expected to grow at 5 percen LLO grow at 5 percent per year for three years and then slow to 2 percent indefinitely. The NBH current historical cost of capital is 10 percent, but the CFO has been 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. He thinks that profit margin and that using a 12 percent hurdle ILIUUIL JPN Assignment and Questions 1. Forecast the free cash flows for Rogue River Medical Associates. 2. Are these cash flows sufficient to make the payments on the purchase price 3. What should the CFO do
