8 - business financing and cost of capital Flashcards
Interest Rate
The risk inherent in the prospective group practice, and thus in the ability to repay the loan, affects the return lenders will require
Inflation
the relevant rate of inflation to a lender is the rate expected in the future, not the rate experienced in the past
maturity
amount of time until a loan matures (must be repaid).
Term Loan
long-term debt financing used by businesses. It typically has a maturity of three to ten years
Bond
ong-term debt used to raise large amounts of capital
Line of Credit
short-term debt financing used by healthcare businesses
restrictive covenants
Provisions in a loan agreement that protect the interests of the lender by limiting the actions of the borrower
investment-grade debt
BBB– or higher rating
junk debt
BB+ or lower rating
credit enhancement (bond insurance)
Insurance that guarantees the payment of interest and repayment of principal on a bond if the borrower (issuer) defaults
capital structure
business’s mix of debt and equity financing, often expressed as the percentage of debt financing.
return on equity (ROE)
Net income divided by the book value of equity (net assets), which measures the dollars of earnings per dollar of equity investment.
financial leverage
use of debt financing, which typically increases (leverages up) the rate of return to owners
trade-off theory
theory proposing that a business’s optimal capital structure balances the costs and benefits associated with debt financing
business risk
risk inherent in the operations of a business, assuming it uses no debt financing
financial risk
The additional risk placed on the business’s owners (or the community) when debt financing is used
Asset structure.
Firms whose assets are suitable as security (collateral) for loans pay lower interest rates on debt financing than do other firms and hence tend to use more debt.
debt capacity
amount of debt in a business’s optimal capital structure
Most hospital target debt range structures
Most hospitals have target structures in the 35 to 40 percent debt range, as measured by the debt-to-financing ratio
Corporate Cost of Capital
corporate cost of capital is the weighted average of the costs of a business’s debt and equity financing
cost of debt
return (interest rate) required by lenders to furnish debt capital
cost of equity
return required by owners to furnish equity capital.
basis point”
is only 1/100th of a percentage point
