2.3 Theresa Davis is in the 40 percent personal tax bracket. She is considering investing in HCA (taxable) bond that carry a 12 percent interest rate.
A. What is her after-tax yield (interest rate) on the bonds?
B. Suppose Twin Cities Memorial Hospital has issued tax-exempt bonds that have an interest rate of 6 percent. With all else the same, should Theresa buy
the HCA or the Twin Cities bonds?
C. With all else the same, what interest rate on the tax-exempt Twin Cities bonds would make these bonds and the HCA bonds equally advantageous

Mini-Lecture 1.2: Healthcare Business Basics

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Chapter 2 focuses on alternative forms of business organization and ownership and how taxes influence finance decisions. Here, the specific differences between non-for-profit and investor-owned businesses are explored. In addition, the chapter briefly describes the nature of a business and types of finance decisions that it must make.
An especially important topic to pay attention to in this chapter is that of tax.
Example 1:
Suppose you pay 40% in taxes that receives $100 in interest. What is your after tax amount (AT$) given the before tax amount (BT$)?
In this simple example you determine AT$ as follows:
AT$ = BT$ x (1 – T)
= $100 x (1 – 0.40)
= $100 x 0.60 = $60.
Example 2:
Suppose you are an individual investor with a tax rate of 28% and you are trying to buy for-profit $1,000 bonds that offer 10% interest. What would be your AT$ and your AT interest (AT%)?
AT$ = (0.10 × $1,000) x (1 – 0.28)
= $100 × 0.72 = $72.
AT% = $72/$1,000
= 7.2%.
If you bought municipal bonds with 8% interest, what would be a for-profit comparable BT% given your tax rate of 28%?
AT% = BT% × (1 – T)
8% = BT% × (1 – 0.28) = BT% × 0.72

BT% = 8% / 0.72 = 11.1%.