Issuing Debt and Bond Valuation

Question 1 

Health care providers are required to implement strategies that are necessary to increase their equity position. The strategies involve consolidating of debts within the organizations and reduce or rearrange expenses. Debts in an organization are one of the leading issues that results in the destabilization of the equity position thus consolidating the debts places an organization at a higher equity position. Expenses among the health care providers affect the equity position of an organization. In this case, the profit and non-profit healthcare providers are required to reduce their expenses to increase their equity positions (Zabolotnyuk, Y., Jones, R., & Veld, 2010).

Question 2 

The first advantage of taxpaying companies to lean towards issuing debt concerns tax saving. In cases where an organization pays interests on a debt, the amount is deducted from taxable income thus saving on the overall tax payable by an organization. The second advantage concerns keeping of future earnings. Issuing of debt allows the company to keep future earnings in a situation when the debt is paid off, and the stakeholders in a given entity are in a position too long-term rewards from the profits.

The disadvantages of issuing debt as opposed to equity concern the increase of break-even point for the entity and the placement of the organization in a less attractive position (Barth, M. E., Landsman, W. R., & Rendleman Jr, 2000). The issue of debts in a given organization requires the company to focus on repaying the debt plus interest thus resulting in significant constraints within the company if it is not in a position to generate more revenue. Additionally, companies with massive debts tend to lose potential investors and lenders considering the debt to equity ratio.

Question 3 

A debenture refers to a type of a bond, which is considered to be an unsecured long-term debt as it does not use any form of collateral. In this type of bond, the risks are high thus requires paying off a higher interest to compensate for the risk (Zabolotnyuk, Y., Jones, R., & Veld, 2010). On the other hand, the subordinated debenture acts as a junior debt to the debenture and is implemented in cases of insolvency.

Question 4 

The primary factor that would drive an investment banker to syndicate a bond issue concerns the issue of risk that is presented with the given securities. A risk is a critical issue in the investment industry thus a proper calculation of risks is essential to eliminate a situation where a company faces a loss of its capital.

Question 5 (a) 

Rate of return = (1000 / 311.80 )^(1/20) = 1.06 or 6%

Question 5 (b) 

The market price of the bond when the market rates are 8% = $80 * PVFA

= (0.08,20) + $1000 * PVF (0.08,20)

= $80 * 9.81 + $1000 * 0.214

Market price = $1000

Question 5 (c) 

= $80 * (0.08,20) + $1000 * (0.05,20)

= $790

Question 5 (d) 

= $60 * (0.06,1) + $1000 * (0.06,1)

= $60 * 0.943 + $1000 * 0.943

=$996.4

Question 5 (e) 

= $120 * (0.12,1) + $1000 * (0.12,1)

=996.8

Question 5 (f) 

The above bond experiences a discount at 3% market rate considering at this rate the value is lower than that of $1000.

On the other hand, the bond sells at a premium at 12 percent market rate.

Question 6 

Undertaking a financial perspective, it is necessary for Mercy to lease the surgical device other than engage in borrowing money to purchase it. Leasing the devise would provide an avenue for earning a higher amount than that which would have been earned from purchasing the device.

References

Barth, M. E., Landsman, W. R., & Rendleman Jr, R. J. (2000). Implementation of an option pricing-based bond valuation model for corporate debt and its components.  Accounting Horizons ,  14 (4), 455-479.

Zabolotnyuk, Y., Jones, R., & Veld, C. (2010). An empirical comparison of convertible bond valuation models.  Financial Management ,  39 (2), 675-706.