. Assum venture healthcare sold bonds that have a 10 year maturity,a 12 percent coupon rate with annual payment and a $1,000 per value
a. Suppose that two years after the bonds were issued, the required interest fell 7 percent. what would the bonds value?
b. Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. what would be the bond value?
c. what would be the value of the bonds three years after issue in each scenario above, assuming that interest rates stayed steady at either 7 percent or 13 percent.
2. Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturity. the par value of the bond is $1,000 and the bond pays interest annually.
a. determine the current value of the bond if present market conditions justify a 14 percent required rate of return.
b. Now suppose Twin Oak four year bond had semiannula coupon payments. what would be its current value? (Assume a 7 percent semiannual required rate of return. However the actual rate would be slightly less risky than an annual coupon bond)
c. Assume that Twin Oak bond had a semiannual coupon but 20 years remainning to maturity. what is the current value under these conditions? ( Again, assume a 7 percent semiannual required rate of return. although the actual rate would probably be greater than 7 percent because of incresed price risk)
3. Minneapolis Health System has a bonds outstanding that have four years remaining to maturity, a coupon interest rate of 9 percent paid annually and a $1,000 per value
a. what is the yeild to maturity on the issue if the current market price is $829?
b. If the current market price is $1,104?
c. Would you be willing to buy one of these bonds for $829 if you are required a 12 percent rate return on the issue? explain your answer
4. Six years ago, Bradford Community Hosiptal issued 20 year municipal bonds with a 7 percent annual coupon rate. the bonds were called today for a $70 call premium that is, bondholders received $1,070 for each bond. what is the relized rate of return for those investors who bought the bonds for $1,000 when they were issued?
PAD6227 Final Take-home Exam
Remember to show your work so that I can give partial credit where possible. Don’t leave it
as blank. Don’t panic. Take a few deep breaths. Good Luck!
Part I Number Crunching Questions (10 points each).
1. A Midwestern state aids its institutions of higher education by giving a credit against its
income tax equal to 50 percent of any gift to such institutions (subject to a limit of $50 credit per
person). Two residents of that state, Mr. Blue (in the 15-percent federal tax bracket) and Ms.
Jones (in the 35-percent federal tax bracket), each contribute $100 to an eligible state university.
a. How much will state tax liabilities of each change as a result their gifts?
b. State income tax payments and contributions to charitable organizations (such as
universities) are both currently deductible from the base used to compute federal liability.
How much will federal tax liability change for Mr. Blue and Ms. Jones as a result of their
contributions?
c. Considering both changes in federal and state liability, what is the net after-tax cost of
Mr. Blue’s and Ms. Jones’s gifts? (Hint: Subtract the changes in state and federal liability
from $100)
d. Suppose the state program changed from a credit to a deduction. If the state tax rate were
a flat 3 percent, how much would state liability form Mr. Blue and Ms. Jones change?
e. From the previous computations, which approach (credit or deduction) do you suppose
universities in the state would favor? Why?
2. The following data are for city A in Florida in the fiscal year 2011:
Budgeted city expenditure $18,000,000
Estimated revenue from grants, fees and licenses $6,000,000
Assessed value of Property $142,000,000
a. What is the city property tax millage rate?
b. The Wooden family has property with assessed value of $150,000 and market value of
$250,000. The Wooden family is qualified for the homestead exemption, which is
$50,000. What is their tax bill from City A?
c. If the Wooden family wants to take the advantage of the portability amendment, they sell
the property and buy another one at the price of $300,000. What is the assessed value on
the new property? And what is the property tax liability on the new property?
Part II Essay Questions (20 points each): Please answer the following questions and use
some “real-world” examples to support your answers whenever possible.
1. Why is property tax unpopular to tax payers? What property tax relief mechanisms can
local government adopt to make it more palatable to tax payers? Please give some real
world examples.
2. Most state governments have raised their sales tax rate over the past 20 years, while
doing little or nothing to increase the sales tax base. Please explain why this is a serious
problem from the long-term viability of revenue stream for state and local governments?
3. City A has decided to shift municipal garbage-collection financing from the property tax
to user charges. Describe some ways in which such a system could be implemented and
argue user charge is a better way to finance garbage-collection than the property tax.
Part III Analytical question (20 points)
Comparing the effects of three changes to the property tax:
1) Assume that the mayor of your city is concerned about the property tax burden on low-income
households. She has asked you to analyze two proposals: (1) a $10,000 homestead exemption on
owner-occupied property per household on the property taxes for low-income homeowners (must
have income less than $20,000 to qualify); and (2) a comprehensive reassessment of all property.
She has asked you to compare the impact on three typical households:
Low-Income Low-Income Upper-Middle
Renter* Homeowner Inc. Homeowner
Total
Income $15,000 $15,000 $50,000
Actual Market Value
of Property $60,000 $60,000 $150,000
Estimated Market
Property Value $60,000 $60,000 $100,000
Assessed Value
of Property $30,000 $30,000 $50,000
* The market value of an apartment is what it would sell for as a condominium.
The other pertinent information for your analysis includes:
– all households have 4 persons
-nominal property tax rate: 5% of assessed value
-official assessment ratio: 50%
-assume all property taxes on rental property are passed onto the renter
Using this information answer the following questions. Show your work in Excel!!
a) Calculate the property taxes paid by each household and the two types of “effective tax
rates” (total taxes divided by income, and total taxes divided by market value) for the
following three cases:
–without the homestead exemption or reassessment
–with the homestead exemption of $10,000;
–with reassessment of property. You can assume reassessment means that all estimated
market values are brought up to actual market value. The assessed values will adjust to
keep the official assessment ratio equal to 50%.
Compare the impact of these two proposals on horizontal and vertical equity relative to
the present system.
b) If you assume that tax rates can be adjusted so that these two proposals raise the same
revenue, evaluate them on the other criteria. Based on your evaluation of all criteria, which
would you recommend?
