Question 3
Note: For questions 1–3, refer to the following scenario:
Arizona Health Services (AHS), a large hospital system, dispenses 250,000 bottles of brand name pharmaceuticals annually in one of its hospitals (assume a constant daily demand). The optimal safety stock, which is on hand initially, is 1,000 bottles. Each bottle costs $10, the holding cost is $.10/unit, and the cost of placing an order with the supplier is $175. Assume an interest rate of 5% and a lag time of 5 days. What is the re-order point for the pharmaceuticals?
Question 3 options:
A) 684
B) 2,054
C) 3,424
D) 4,424

Question 4
Note: For questions 4–8, refer to the following scenario:
Arizona Health Services (AHS) buys $500,000 of a particular item (at gross prices) from its major supplier, Cardinal Health, which offers AHS terms of 3/20, net 60. Currently, the hospital is paying the supplier the full amount due on Day 60 but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 12% interest rate.
What is the amount of free trade credit that AHS obtains from Cardinal Health? (Assume 360 days per year throughout this problem.)
Question 4 options:
A) $10,347
B) $26,944
C) $53,888
D) $80,833

Question 5
Note: For questions 4–8, refer to the following scenario:
Arizona Health Services (AHS) buys $500,000 of a particular item (at gross prices) from its major supplier, Cardinal Health, which offers AHS terms of 3/20, net 60. Currently, the hospital is paying the supplier the full amount due on Day 60 but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 12% interest rate.
What is the amount of costly trade credit?
Question 5 options:
A) $10,347
B) $26,944
C) $53,888
D) $80,833

Question 6
Note: For questions 4–8, refer to the following scenario:
Arizona Health Services (AHS) buys $500,000 of a particular item (at gross prices) from its major supplier, Cardinal Health, which offers AHS terms of 3/20, net 60. Currently, the hospital is paying the supplier the full amount due on Day 60 but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 12% interest rate.
What is the approximate annual cost of the costly trade credit?
Question 6 options:
A) 13.80%
B) 27.80%
C) 37.80%
D) 50%

Question 7
Note: For questions 4–8, refer to the following scenario:
Arizona Health Services (AHS) buys $500,000 of a particular item (at gross prices) from its major supplier, Cardinal Health, which offers AHS terms of 3/20, net 60. Currently, the hospital is paying the supplier the full amount due on Day 60 but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 12% interest rate.
Should AHS replace its trade credit with the bank loan?
Question 7 options:
A) No. The bank loan rate is higher than the costly credit rate, so AHS should take the costly credit.
B) Yes. The bank loan rate is lower than the costly credit rate, so AHS should take the bank loan and refuse all trade credit.
C) Yes. The bank loan rate is lower than the costly credit rate, so AHS should replace the costly credit portion of the credit with a bank loan.
D) Yes. The bank loan rate is higher than the costly credit rate, so AHS should take the credit.

Question 8
Note: For questions 4–8, refer to the following scenario:
Arizona Health Services (AHS) buys $500,000 of a particular item (at gross prices) from its major supplier, Cardinal Health, which offers AHS terms of 3/20, net 60. Currently, the hospital is paying the supplier the full amount due on Day 60 but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 12% interest rate.
If the bank loan is used, how much of the trade credit should be replaced?
Question 8 options:
A) $13,477
B) $26,944
C) $53,889
D) $80,233

Question 9
Note: For questions 9–10, you will be asked to conduct an evaluation of lease financing. Refer to Chapter 18, “Lease Financing and Business Valuation,” for background in: Gapenski, L. C. (2012). Healthcare finance: An introduction to accounting and financial management (6th ed.). Chicago, IL: Health Administration Press.
AHS must install a new $1.5 million computer to track patient records in its multiple service areas. It plans to use the computer for only 3 years, at that time a new system will be acquired that will handle both billing and patient records. The company can borrow money at a before-tax cost of 10%. In lieu of buying, AHS could lease the computer for 3 years.
Assume that the following facts apply:
1. The computer falls into the 3-year class for tax depreciation, so the modified accelerated cost recovery system (MACRS) allowances are 0.33, 0.45, 0.15, and 0.07 in Year 1 through Year 4, respectively.
2. The company's marginal tax rate is 34%.
3. Tentative lease terms call for payments of $500,000 at the beginning of each year.
4. The best estimate for the value of the computer after 4 years of wear and tear is $300,000.
What is the net advantage to leasing (NAL)?
Question 9 options:
A) -567,032
B) 306,366
C) 345,060
D) 1,202,393

Question 10
Note: For questions 9–10, you will be asked to conduct an evaluation of lease financing. Refer to Chapter 18, “Lease Financing and Business Valuation,” for background in: Gapenski, L. C. (2012). Healthcare finance: An introduction to accounting and financial management (6th ed.). Chicago, IL: Health Administration Press.
AHS must install a new $1.5 million computer to track patient records in its multiple service areas. It plans to use the computer for only 4 years, at that time a new system will be acquired that will handle both billing and patient records. The company can borrow money at a before-tax cost of 10%. In lieu of buying, AHS could lease the computer for 4 years.
Assume that the following facts apply:
1. The computer falls into the 3-year class for tax depreciation, so the modified accelerated cost recovery system (MACRS) allowances are 0.33, 0.45, 0.15, and 0.07 in Year 1 through Year 4, respectively.
2. The company's marginal tax rate is 34%.
3. Tentative lease terms call for payments of $500,000 at the beginning of each year.
4. The best estimate for the value of the computer after 4 years of wear and tear is $300,000.
What is the internal rate of return (IRR) of the lease?
Question 10 options:
A) 5%
B) 7%
C) 19%
D) 29%

Question 11
A national capital structure for AHS is provided below. The company plans to maintain its debt structure in the future. If the firm has a 5.5% after-tax cost of debt, a 13.5% cost of preferred stock and an 18% cost of common stock, what is the firm's weighted average cost of capital (WACC)?
Note: Refer to “Definition of ‘Weighted Average Cost of Capital—WACC’” for more information.
Capital Structure (in Ks)
Bonds 1,083
Preferred Stock 268
Common Stock 3,681
Total $5,032
Question 11 options:
A) 1.18%
B) 15.07%
C) 13.17%
D) 73.15%

Question 12
For this question, you will be asked to conduct an expected rate of return or yield to maturity (YTM) on a bond. Refer to Chapter 11, “Long-Term Debt Financing,” for background. AHS bonds have just been released and are selling in the market for $1,045. These 15-year bonds pay 7% annually on a $1,000 par value. If the bond is purchased at market price, what is the expected yield to maturity?
Question 12 options:
A) 1.05%
B) 6.52%
C) 7%
D) 7.05%

Question 13
AHS common stock paid $1.32 in dividends last year and is expected to grow indefinitely at an annual 7% rate. What is the value of the stock if you require an 11% return?
Question 13 options:
A) $14.50
B) $27.60
C) $30
D) $33

Question 14
For questions 14 and 15, use the following scenario:
The AHS system is evaluating two different computer systems for handling provider claims. There are no incremental revenues attached to the projects, so the decision will be made on the basis of the present value of costs. AHS's corporate cost of capital is 10%. Here are the net cash flow estimates in thousands of dollars:
Year System X System Y
0 -$900 -$1500
1 $1,500 $800
2 $250 $900
3 $300 $1,200
Assume initially that the systems both have average risk. Which one should be chosen?
Question 14 options:
A) System X, because it has the higher NPV, at about $895,000.
B) System Y, because it has the lower NPV, at about $872,000.
C) System X, because it has the lower NPV, at about $872,000.
D) System Y, because it has the higher NPV, at about $895,000.

Question 15
For questions 14 and 15, use the following scenario:
The AHS system is evaluating two different computer systems for handling provider claims. There are no incremental revenues attached to the projects, so the decision will be made on the basis of the present value of costs. AHS's corporate cost of capital is 10%. Here are the net cash flow estimates in thousands of dollars:
Year System X System Y
0 -$900 -$1500
1 $1,500 $800
2 $250 $900
3 $300 $1,200
Assume that System X is judged to have high risk. AHS accounts for differential risk by adjusting its corporate cost of capital by 2 percentage points. Which system should be chosen?
Question 15 options:
A) System X, because the net cash flow for System X will increase to $895,000.
B) System X, because the net cash flow for System X will increase to $852,000.
C) System Y, because the net cash flow for System X will decrease to $852,000.
D) System Y, because the net cash flow for System X will increase to $895,000.

Question 3 Note: For questions 1–3, refer to the following scena...