Questions and Answers of Financial Management Theory

What is the impact of debt financing on owners’ rate of return?
What is the impact of debt financing on owners’ risk?
What is the basis for choosing the optimal level of debt financing?
What is the relationship between a business’s use of debt financing and its cost of debt? Its cost of equity? Its overall cost of capital?
How is the optimal capital structure defined?
Why is the optimal capital structure often called the target capital structure?
Is it critical that the precise structure be identified and followed?
What are some of the factors that managers must consider when setting the target capital structure?
What is meant by a business’s debt capacity?
What unique problems do managers of not-for-profit businesses face regarding capital structure decisions?
Why is capital structure important to the managers of not-forprofit businesses?
How does a business’s target capital structure influence its financing decisions?
Why is it best to specify the target capital structure as a range rather than as a single value?
Should the component costs reflect historical or marginal costs?
What are some methods used to estimate a firm’s cost of debt?
What is the impact of flotation costs on the cost of debt? Are these costs generally material?
Not-for-profit businesses can issue tax-exempt debt and pay a lower interest rate on debt financing than for-profit businesses can.Does this mean that debt financing generally is less costly for
What are the three primary methods of estimating a for-profit firm’s cost of equity?
How would you choose between widely different cost-of-equity estimates?
What is the cost of fund capital to not-for-profit healthcare businesses?
What is the primary difference between the CCC for invest or owned and not-for-profit firms?
What are the problems faced by small businesses when estimating the CCC?
Should large businesses estimate divisional costs of capital? Explain your answer.
Critique this statement: “The use of debt financing lowers the net income of the firm, so debt financing should be used only as a last resort.”
What is meant by a firm’s debt capacity?
Discuss some factors that health services managers must consider when setting a firm’s target capital structure. Consider both investor-owned and not-for-profit firms in your answer.
Is the corporate cost-of-capital estimate based on historical or marginal costs? Why?
What capital components are typically included when estimating a firm’s CCC?
How may a firm’s cost of debt be estimated?
a. Why is there a cost to retained earnings in investor-owned businesses?b. What are the three methods commonly used to estimate the cost of equity?c. Is the risk premium in the CAPM the same as the
What is the economic interpretation of the CCC?
Is the CCC the same for all firms? Explain your answer.
For any given firm, can the CCC be used as the hurdle rate for all projects under consideration? Explain your answer.
Seattle Health Plans currently uses zero-debt financing. Its operating income (earnings before interest and taxes, or EBIT) is$1 million, and it pays taxes at a 30 percent rate. It has $5 million in
Calculate the after-tax cost of debt for the Wallace Clinic, a for profit healthcare provider, assuming that the coupon rate set on its debt is 11 percent and its tax rate isa. 0 percent.b. 20
St. Vincent’s Health Care has a target capital structure of 35 percent debt and 65 percent equity. Its cost-of-equity (fund capital)estimate is 13.5 percent and its cost-of-tax-exempt-debt estimate
Richmond Clinic has obtained the following estimates for its costs of debt and equity at different capital structures:What is the firm’s optimal capital structure? (Hint: Calculate its corporate
Medical Group is a large for-profit group practice. Its dividends are expected to grow at a constant rate of 7 percent per year into the foreseeable future. The firm’s last dividend (D0) was $2,
Morningview Nursing Home, a not-for-profit corporation, is estimating its CCC. Its tax-exempt debt currently requires an interest rate of 6.2 percent, and its target capital structure calls for 60
Golden State Home Health, Inc., is a large, California-based forprofit home health agency. Its dividends are expected to grow at a constant rate of 5 percent per year into the foreseeable future.The
A local entrepreneur is looking for investors in a new company that will develop mobile apps for behavioral health. The company requires $15 million in start-up funds. It can be capitalized with 100
A relatively small medical group practice is trying to estimate its CCC. The practice is 100 percent equity financed. The rate of return on 20-year Treasury bonds is currently 4 percent, and the
Explain the four steps in capital budgeting financial analysis.
Briefly discuss the following concepts associated with cash flow estimation:a. Incremental cash flowb. Cash flow versus accounting incomec. Cash flow timingd. Project lifee. Terminal valuef. Salvage
Evaluate the following statement: “Ignoring inflation effects and strategic value can result in overstating a project’s financial attractiveness.”
What are the key differences in cash flow analyses performed by investor-owned and not-for-profit businesses?
How do expansion and replacement cash flow analyses differ?
What is payback?
What are the benefits of payback?
What are its deficiencies when used as the primary evaluation tool?
Briefly describe how to calculate net present value (NPV), internal rate of return (IRR), and modified IRR (MIRR).
What is the rationale behind each method?
Evaluate the following statement: “The difficulty in calculating numerous breakeven and profitability measures restricts the amount of information available in capital budgeting analyses.”
What is a post-audit?
a. What is capital budgeting? Why are capital budgeting decisions so important to businesses?b. What is the purpose of placing capital projects into categories such as mandatory replacement or
Briefly define the following cash flow estimation concepts.a. Incremental cash flowb. Cash flow versus accounting incomec. Sunk costd. Opportunity coste. Changes in current accountsf. Strategic value
Describe the following project breakeven and profitability measures.Be sure to include each measure’s economic interpretation.a. Paybackb. Net present value (NPV)c. Internal rate of return (IRR)d.
Critique this statement: “NPV is a better measure of project profitability than IRR because NPV leads to better capital investment decisions.”
a. Describe the net present social value (NPSV) model.b. What is a project scoring matrix?
What is a post-audit? Why is the post-audit critical to good investment decision-making?
From a purely financial perspective, are there situations in which a business would be better off choosing a project with a shorter payback over one that has a larger NPV?
Winview Clinic is evaluating a project that costs $52,125 and has expected net cash inflows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the
Michigan Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated pretax
You have been asked by the president and CEO of Kidd Pharmaceuticals to evaluate the proposed acquisition of a new labeling machine for one of the firm’s production lines. The machine’s price is
The staff of Jefferson Memorial Hospital has estimated the following net cash flows for a satellite food services operation that it may open in its outpatient clinic:The year 0 cash flow is the
BetterCare Insurance Company is considering the development of a case management program for its insured diabetics. BetterCare has estimated that the case management program will cost $200,000 in
Assume that you are the chief financial officer at General Hospital.The CEO has asked you to analyze two proposed capital investments—project X and project Y. Each project requires a net investment
What type of project risk generally is the most measurable?
How are the types of project risk related?
How do most firms incorporate differential risk into the capital budgeting decision process?
a. Why is risk analysis so important to the capital budgeting process?b. Describe the three types of project risk. Under what situation is each of the types most relevant to the capital budgeting
a. Briefly describe sensitivity analysis.b. What are its strengths and weaknesses?
a. Briefly describe scenario analysis.b. What are its strengths and weaknesses?
a. Briefly describe Monte Carlo simulation.b. What are its strengths and weaknesses?
a. How is project risk incorporated into a capital budgeting analysis?b. Suppose that two mutually exclusive projects are being evaluated on the basis of cash costs. How would risk adjustments be
What is the difference between the corporate cost of capital and a project cost of capital?
What is meant by the term capital rationing? From a purely financial standpoint, what is the optimal capital budget under capital rationing?
Santa Roberta Clinic has estimated its corporate cost of capital to be 11 percent. What are reasonable values for the project costs of capital for low-risk, average-risk, and high-risk projects?
Describe the qualitative approach to risk assessment. Why does this approach, which does not rely on numerical data, work?
Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities (Prob.):The year 5 values include salvage value. Heywood’s corporate cost of capital is 10
Arc Managed Care Company is evaluating two different computer systems for handling provider claims. There are no incremental revenues attached to the projects, so the decision will be made on the
Pediatric Partners is evaluating a project with the following net cash flows and probabilities:The year 5 values include salvage value. Pediatric Partners’corporate cost of capital is 12 percent.a.
What is the goal of current accounts management?
Describe how seasonal volume fluctuations influence current asset levels and financing requirements.
What is float?
How do firms use float to increase cash management efficiency?
Why do organizations need a cash budget?
Why do firms hold marketable securities?
How are these holdings reported on the balance sheet?
What four phases make up the revenue cycle?
What are some implications for the revenue cycle of value-based payment?
Why is good supply chain management important to a firm’s success?
What are accruals, and what is their role in short-term financing?
How might a hospital that expects to have a cash shortage sometime during the coming year make sure that needed funds will be available?
What is the current asset most commonly pledged as security for short-term loans?
a. What is the goal of cash management?b. Briefly describe float and the following associated cash management techniques:• Receipt acceleration• Disbursement control
a. What is a cash budget, and how is it used?b. Should depreciation expense appear on a cash budget? Explain your answer.
a. Give two reasons why businesses hold marketable securities.b. Which types of securities are most suitable for holding as marketable securities?c. Suppose Southwest Regional Medical Center has just
a. What is meant by the term revenue cycle?b. What are the three sets of activities that make up the revenue cycle?c. What is the overall goal of revenue cycle management?
a. Define the term average collection period (ACP).b. How is ACP used to monitor overall revenue cycle performance?c. What is an aging schedule?d. How is an aging schedule used to monitor overall

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