Deck 17: Capital Structure: Long-Term Debt and Equity Financing

Question 1

How do capital structures differ between for-profit and not-for-profit health care organizations?

Answer 1

Capital structure defines how assets are financed. For-profits can use debt and equity (ownership); not-for-profits can use debt and net assets. Net assets are acquired through operating profits and contributions.

Question 2

Assume that a not-for-profit company has $20 million of long-term tax-exempt debt with an interest rate of 6.0%. The organization has $3 million of unrestricted net assets, with an estimated cost of capital of 7.5%, and $9 million in an endowment with an estimated 5.0% return on assets (cost of capital). What is its weighted average cost of capital?

Answer 2

$20 million long-term debt x 6.0% = $1,200,000
$3 million unrestricted NA x 7.5% = $225,000
$9 million restricted NA x 5.0% = $450,000
$32 million total capital Total Cost: $1,875,000
$1,875,000/$32,000,000 x 100% = 5.86% average cost of capital

Question 3

Match the following terms to their definitions.

-__ Stock options

A) Gives holders the right but not the obligation to purchase shares of stock.
B) Gives holders the right to buy a share of stock at a stated price at an exercise price above current market levels.
C) Payments made to owners from corporate profits.
D) Debt or stock that can be changed into shares of common stock.
E) Gives holders the right to buy a share of stock at a stated price.

Answer 3

Gives holders the right but not the obligation to purchase shares of stock.

Question 4

Match the following terms to their definitions.

-__ Stock rights

A) Gives holders the right but not the obligation to purchase shares of stock.
B) Gives holders the right to buy a share of stock at a stated price at an exercise price above current market levels.
C) Payments made to owners from corporate profits.
D) Debt or stock that can be changed into shares of common stock.
E) Gives holders the right to buy a share of stock at a stated price.

Question 5

Match the following terms to their definitions.

-__ Warrants

A) Gives holders the right but not the obligation to purchase shares of stock.
B) Gives holders the right to buy a share of stock at a stated price at an exercise price above current market levels.
C) Payments made to owners from corporate profits.
D) Debt or stock that can be changed into shares of common stock.
E) Gives holders the right to buy a share of stock at a stated price.

Question 6

Match the following terms to their definitions.

-__ Convertibles

A) Gives holders the right but not the obligation to purchase shares of stock.
B) Gives holders the right to buy a share of stock at a stated price at an exercise price above current market levels.
C) Payments made to owners from corporate profits.
D) Debt or stock that can be changed into shares of common stock.
E) Gives holders the right to buy a share of stock at a stated price.

Question 7

Match the following terms to their definitions.

-__ Dividends

A) Gives holders the right but not the obligation to purchase shares of stock.
B) Gives holders the right to buy a share of stock at a stated price at an exercise price above current market levels.
C) Payments made to owners from corporate profits.
D) Debt or stock that can be changed into shares of common stock.
E) Gives holders the right to buy a share of stock at a stated price.