Pacific Healthcare is an investor-owned hospital chain that owns and operates nine hospitals in Washington, Oregon, and northern California. Marcia Long, a recent graduate of a prominent health administration program, has just been hired by Washington Medical Center, Pacific's largest hospital. Like all new management personnel, Marcia must undergo three months of intensive indoctrination at the system level before joining the hospital. Marcia began her indoctrination in January 2014. Her first assignment at Pacific was to review its latest annual report. This was a stroke of luck for Marcia because her father owned several bonds issued by Pacific, and Marcia was especially interested in whether or not her father had made a good investment. To glean more information about the bonds, Marcia examined Note E to Pacific's consolidated financial statements, which lists the company's long-term debt obligations, including its first mortgage bonds, installment contracts, and term loans. Table 14.1 contains information on four of the first mortgage bonds listed in Pacific's annual report. All four bonds pay interest semi-annually. Pacific's chief financial officer, Hugo Welsh, found out about Marcia's interest in the firm's debt financing. Because you are so interested in our financial structure, he said, I want you to do the bond valuation and make a presentation to our executive committee. Hugo then asked Marcia to perform the calculations required to complete Exhibit 14.2 and to think about some of the questions that members of the committee might ask her about the numbers.

a. What is the estimated value of Pacific Healthcare on December 31, 2013?

b. Is the stock under-or-overpriced?

c. If investors estimate that Pacific Healthcare will grow about 10% per year for the next five years (201418), what constant growth rate (2019+) are they actually using to price the stock?

What is the estimated value of the stock on December 31, 2014, 2015, 2016, 2017, and 2018?

a. What are the estimated dividend yield, capital gains yield, and the total returns for 2014, 2015, 2016, 2017, and 2018? (3 points)

b. Why do the dividend yield and capital yield gains change every year? (2 points)

c. What do you notice about the total returns? (2 points)