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Riley Bug · May 12, 2013, 07:54 PM

Suppose that Apex Health Services has four different projects. These projects are listed below, along with the amount of capital invested and estimated corporate and market betas:

Project Amount Invested Corporate Beta Market Beta
Walk-in clinic $ 500,000 1.5 1.1
MRI facility 2,000,000 1.2 1.5
Clinical lab. 1,500,000 0.9 0.8
X-ray lab. 1,000,000 0.5 1.0
$5,000,000

a. Why do the corporate and market betas differ for the same project?
b. What is the overall corporate beta of Apex Health Services? Is the calculated beta consistent with corporate risk theory?
c. What is the overall market beta of Apex Health Services?
d. How does the riskiness of Apex’s stock compare with the riskiness of an average stock?
e. Would stock investors require a rate of return on Apex that is greater than, less than, or the same as the return on an average-risk stock?

Riley Bug · May 12, 2013, 07:57 PM

Consider the following uneven cash flow stream:

Year Cash Flow
0 $2,000
1 2,000
2 0
3 1,500
4 2,500
5 4,000

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 future (Year 5) value of the cash flow stream if the cash flows are invested in an account that pays 10 percent annually?
c. What cash flow today (Year 0), in lied of the $2,000 cash flow, would be needed to accumulate $20,000 at the end of Year 5? (Assume that the cash flows for Years 1 through 5 remain the same.)
d. Time value analysis involves either discounting or compounding cash flows. Many health care financial management decisions-such as bonding refunding, capital investment, and lease versus buy-involve discounting projected future cash flows. What factors must executives consider when choosing a discount rate to apply to forecasted cash flows?

Riley Bug · May 12, 2013, 08:00 PM

Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound machine:

State of the economy Probability of Occurrence Rate of Return

Very poor 0.10 −10.0%
Poor 0.20 0.0
Average 0.40 10.0
Good 0.20 20.0
Very good 0.10 30.0

a. What is the expected rate of return on the project?
b. What is the project’s standard deviation of returns?
c. What is the project’s coefficient of variation (CV) of returns?
d. What type of risk do the standard deviation and CV measure?
e. In what situation is this risk relevant?