AEM 4570: Advanced Corporate Finance
Name: Di Hu
Net ID: dh583 1. What are the key elements of Green Valley’s strategy?
a. What kind of hospital is it, and how does that relate to their overall strategy?
Green Valley Medical Center is a nonprofit teaching hospital comprising of 330 beds affiliated with a large state university in a midsize town located several hours from the state’s two urban centers. It was the only regional hospital, and one of only two in the state, with facilities in cardiology, oncology, and neurology, specialised in teaching, research and clinical care. Moreover, Green Valley had issued municipal revenue bonds on several occasions to finance large …show more content…
If the request of administrative support can largely reduce the cost expense and improve the work efficiency, the Board of Trustees should accept it. Lacking of reliable financial data, even though the available funds for hospital capital purchases had grown at a rate of 10 to 15 percent every year, the financial director could not make reasonable and strategical decision since how the money was distributed was not clear. Moreover, the requests were classified by cost groupings, not by priority. The potential consequences is that some important requests might be ignored by the Board of Trustees since the cost is not expensive. 3. How do you think the two projects will fair under Mr. Klein’s new capital budgeting technique?
a. Calculate each project’s net present value (NPV) i. What is the right discount rate to use?
[Worksheet 1: Discount rate]
Using WACC formula: WACC=[E/(E+D)]*(Re)+[D/(E+D)]*(Rd)(1Te) E = market value of the firm's equity, D = market value of the firm's debt, Re = cost of equity, Rd = cost of debt,
Tc =corporate tax rate, E/(E+D) = percentage of financing that is equity, D/(E+D) = percentage of financing that is debt. Assume corporate tax rate is 0%, and the cost of equity is 10% as Mr. Klein believed.
According to the calculation of WACC, the appropriate discount rate is 8.11%. ii. How does varying the discount rate change the NPV of each project?