The avenues available for for-profit healthcare providers to increase their equity position would be to increase the operation and non-operation incomes, issue stock, and to create partnerships. For non-profit health care providers, internally generated funds, philanthropy, and government grants would be the best ways to increases their equity.
The advantages for a taxpaying entity in issuing debt as opposed to equity is that debt does not dilute ownership interest, it is better for short-term financing, interest on debt can be deducted for tax purposes (Coplan, 2009). Other advantages are that there is less complication when there are funds raised through debt there are fewer laws and regulations that must be complied. There are future obligations of principle and interest payments. The disadvantages are companies with high debt see that it is difficult to serve the cost of debt. Debt has a fixed obligation that must be paid at some point, there are greater restrictions on a company regarding debt financing through alternate sources, companies with high debt and equity ratio are riskier, and interest repayment is a fixed obligation which must be paid even if the company does not earn adequate profits (Coplan, 2009).
Subordinated debentures are unsecured bonds that make them minor to all present and future debt in the event of default, liquidation, reorganization, and bankruptcy. It is debt that is ranked after all other debts, has a lower priority than other bonds, is repayable after other debts have been paid, are riskier compared to other types of debts, have a higher rate of return, and have a lower credit rating than senior bonds. Debenture is an unsecured loan certificate issued by a company and backed by a general credit rather than by specified assets. It is a medium to long-term debt format used by large companies to borrow money at a fixed-rate.
4. Why would an investment banker syndicate a bond issue with other investment bankers?
5. If a $1,000 zero coupon bond with a 20-year maturity has a market price of $311.80, what is its rate of return?
6. A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $1,000.
7. If a required market rates are 8 percent, what is the market price of the bond?
8. If required market rates fall to 5 percent, what is the market price of the bond?
9. Charles City Hospital plans on issuing a tax-exempt bond at the bond is $1,000.
10. If required market rates are 6 percent, what is the value of the bond?
11. If required market rates fall to 12 percent what is the value of the bond?
12. At what required market rate (3,6, or 12 percent) does the above bond sell at a discount? At a premium?
13. Mercy Medical Mega Center , a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $400,000 and will be depreciated on straight-line basis over five years to a zero salvage value. Mercy Medical could borrow the full amount at a 15 percent rate for five years. The after-tax cost of debt equals 9 percent. Alternatively, it could lease the device for five years. The before-tax lease payments per year would be $80,000. The tax rate for this MegaCenter is 40 percent. From a financial perspective, should Mercy lease the surgical device or borrow the money to purchase it and why?
References Coplan, J. (2009). Raising Capital: Equity vs. Debt. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2009-12-04/raising-capital-equity-vs-dot-debt