UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 4 — Time Value Analysis

PROBLEM 10

Assume that $10,000 was invested in the stock of General Medical Corporation with the intention of

selling after one year. The stock pays no dividends, so the entire return will be based on the price of the

stock when sold. The opportunity cost of capital on the stock is 10 percent.

a. To begin, assume that the stock sale nets $11,500. What is the dollar return on the stock investment?

What is the rate of return?

b. Assume that the stock price falls and the net is only $9,500 when the stock is sold. What is the dollar

return and rate of return?

c. Assume that the stock is held for two years. Now, what is the dollar return and rate of return?

ANSWER

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 5 — Financial Risk and Required Return

PROBLEM 10

HMA, Universal, and the market have had the following returns over the past four years:

Year Market HMA Universal

1 11% 10% 12%

2 7% 4% -3%

3 17% 12% 21%

4 -3% -2% -5%

The risk-free rate is 7 percent. The market risk premium is 5 percent. The expected rate of

return on both stocks is 12 percent. Which stock would you purchase?

ANSWER