8 - business financing and cost of capital

Question 1

Interest Rate

Answer 1

The risk inherent in the prospective group practice, and thus in the ability to repay the loan, affects the return lenders will require

Question 2

Inflation

Answer 2

the relevant rate of inflation to a lender is the rate expected in the future, not the rate experienced in the past

Question 3

maturity

Answer 3

amount of time until a loan matures (must be repaid).

Question 4

Term Loan

Answer 4

long-term debt financing used by businesses. It typically has a maturity of three to ten years

Question 5

Bond

Answer 5

ong-term debt used to raise large amounts of capital

Question 6

Line of Credit

Answer 6

short-term debt financing used by healthcare businesses

Question 7

restrictive covenants

Answer 7

Provisions in a loan agreement that protect the interests of the lender by limiting the actions of the borrower

Question 8

investment-grade debt

Answer 8

BBB– or higher rating

Question 10

junk debt

Answer 10

BB+ or lower rating

Question 11

credit enhancement (bond insurance)

Answer 11

Insurance that guarantees the payment of interest and repayment of principal on a bond if the borrower (issuer) defaults

Question 12

capital structure

Answer 12

business’s mix of debt and equity financing, often expressed as the percentage of debt financing.

Question 13

return on equity (ROE)

Answer 13

Net income divided by the book value of equity (net assets), which measures the dollars of earnings per dollar of equity investment.

Question 14

financial leverage

Answer 14

use of debt financing, which typically increases (leverages up) the rate of return to owners

Question 15

trade-off theory

Answer 15

theory proposing that a business’s optimal capital structure balances the costs and benefits associated with debt financing

Question 16

business risk

Answer 16

risk inherent in the operations of a business, assuming it uses no debt financing

Question 17

financial risk

Answer 17

The additional risk placed on the business’s owners (or the community) when debt financing is used

Question 18

Asset structure.

Answer 18

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.

Question 19

debt capacity

Answer 19

amount of debt in a business’s optimal capital structure

Question 20

Most hospital target debt range structures

Answer 20

Most hospitals have target structures in the 35 to 40 percent debt range, as measured by the debt-to-financing ratio

Question 21

Corporate Cost of Capital

Answer 21

corporate cost of capital is the weighted average of the costs of a business’s debt and equity financing

Question 22

cost of debt

Answer 22

return (interest rate) required by lenders to furnish debt capital

Question 23

cost of equity

Answer 23

return required by owners to furnish equity capital.

Question 24

basis point”

Answer 24

is only 1/100th of a percentage point

Question 25

trustee

Answer 25

person assigned to make sure that the terms of a bond contract are carried out.

Question 26

capital investment decisions

Answer 26

business will use the CCC as the required rate of return for average-risk projects.