Seattle Health Plans currently uses zero-debt financing. Its operating profitis si
milion, and it pays taxes at a 40 percent rate. It has $5 million in assets and, be.
Falseh, sal equally financed, 55 million in equity. Suppose the firm is considering
replacing hall of its equity financing with debt financing that bears an interest rale
of 8 percent.
a. What impact would the new capital structure have on the firm's profit, total dol.
lar return to investors, and return on equity?
b. Redo the analysis, but now assume that the debt financing would cost 15 percent.
C. Repeat the analysis required for part a, but now assume that Seattle Health
Plans is a not-for-profit corporation and hence pays no taxes. Compare the
results with those obtained in part a.

XYZ Health Organization has a division that currently uses zero debt financing. Assume that the operating income (EBIT) is 1,000,000 SAR. Assume that the firm has 5,000,000 SAR in Assets with an equal amount in equity (because it currently has no debt). The firm wants to expand its product offerings and is considering replacing half of its equity financing with debt financing at an interest rate of 8%. The corporate tax rate is 20%. Assume that you are the Chief Financial Officer of the organization.

1. Determine how the new capital structure would impact the firm’s net income, total dollar return to investors, and ROE?
2. Conduct the analysis again but assume that the cost of debt has risen to 15%?
3. Then using the original 8% interest rate, assume that annual EBIT has dropped to 500,000 SAR or could go as high as 1.5 million SAR (both with a probability of 20%). While there is a 60% chance that EBIT will remain 1,000,000 SAR. Redo the analysis for each level of EBIT and determine the expected values for the division’s net income, total dollar return to investors, and ROE.

After you have conducted all the calculations, make recommendations to the company as to which avenue the company should take. Consider what you have learned about the healthcare needs under SV2030 as well as your knowledge of the healthcare industry.

Gulf Coast Tours currently has a weighted average cost of capital of 11.3 percent based on a combination of debt and equity financing. The firm has no preferred stock. The current debt-equity ratio is 0.58 and the aftertax cost of debt is 6.4 percent. The company just hired a new president who is considering eliminating all debt financing. All else constant, what will the firm's cost of capital be if the firm switches to an all-equity firm?

10.45 percent

12.62 percent

12.89 percent

13.37 percent

14.32 percent