1. Assume that HCA is evaluating the feasibility of building a new hospital in an area not currently served by the company. The company’s analysts estimate a market beta for the hospital project of 1.1, which is somewhat higher than the 0.8 market beta of the company’s average project. Financial forecasts for the new hospital indicate an expected rate of return on the equity portion of the investment of 20 percent. If the risk-free rate, RF, is 7 percent and the required rate of return on the market, R(Rm), is 12 percent, is the new hospital in the best interest of HCA’s shareholders? Explain your answer.
2. Consider the following uneven cash flow stream:
Year Cash Flow
a. What is the present (Year 0) value if the opportunity cost (discount) rate is 10 percent?
b. Add an outflow (or cost) of $1,000 at Year 0. What is the present value (or net present value) of the stream?
Find the following values for a lump sum:
– The future value of $500 invested at 8 percent for one year
– The future value of $500 invested at 8 percent for five years
– The present value of $500 to be received in one year when the opportunity cost rate is 8 percent
– The present value of $500 to be received in five years when the opportunity cost rate is 8 percent
a. Annual compounding
b. Semiannual compounding
c. Quarterly compounding