35. 35. Northwest Hospital is considering a new replacement hospital and plans t

Question

35. 35. Northwest Hospital is considering a new replacement hospital and plans to issue long-term bonds to finance the project. Before it meets with its investment bankers, the hospital wants to estimate how much additional debt it can take on. Cur- rently, the hospital has annual debt service payments of $3 million, and its cash flow available to meet debt service payment is $65 million per year. For its new debt issuance, the hospital plans to issue fixed rate debt for 20 years. It also assumes that Fitch Ratings will assign it an A rating. Fitch’s median debt service coverage ratio for A rated bonds is 4.4x. The expected fixed interest rate for a 20-year, A rated, tax-exempt bond is 5 percent. Using Fitch’s median debt service coverage ratio for an A rated bond along with the prior information, how much additional debt could Northwest Hospital take on? (Hint: see Appendix G.)

Explanation / Answer

Fitch's A-rate bond debt-service coverage ratio = 4.4x

Currently available cash flow after meeting current debt service = $(65 - 3) million = $62 million

So, Total debt service for the new issue can be maximum $62 million / 4.4 = $14.09 million

For a bond, annual debt-service payment = annual interest rate payment

= $1,000 x 5% = $50 per year [Assuming standard par value of a bond = $1,000]

If number of bonds issued = Z, then

Z x $50 = $14.09 million

Z = $14.09 million / $50 = 281,800 bonds

Total issue price of the bonds = 281,800 x $1,000 = $281.8 million [Additional debt that can be raised as bonds]

Northwest can take additional debt of [$14.9 million / $

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