Capital Budgeting for a Healthy Capital Structure Healthy capital formation in the health care industry is crucial for organizations to achieve their long-term objectives (Cleverley, Cleverly & Song, 2010). Long-term projects require large investments and cash outlay, which precedes the receipt of cash inflow in future time (Finkler, Calabrese and Ward, 2011). Therefore, organizations tend to predict profitability by evaluating if the long-term projects expected return is great enough to justify the risk (Finkler et al., 2011). This analysis or evaluation is capital budgeting (Finkler et al., 2011). There are three approaches to assess capital budgeting, the payback method, the net value method and the internal rate of return method (Finkler et al., 2011). To understand net value and internal rate of return, acknowledgement of the time value of money is necessary (Finkler et al., 2011). However, the money needed to make these investments needs to come from somewhere. This money is referred to as capital (Finkler et al., 2011). The dominant sources of capital are stock issuance, or charitable donations (equity financing) or loans (debt financing) (Finkler et al., 2011). The choices (equity or debt) made respect to obtaining resources determines the capital structure of the organization (Finkler et al., 2011). A successful capital structure maintains the cost of capital low (Finkler et al., 2011). The cost of capital is the weighted average of the cost common stock, preferred
This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period, discounted payback period, NPV, IRR, MIRR,
Capital planning and budgeting is a very vital piece in the Public Budgeting System process. It is an essential implement in the financial management practice and is effective in both public and private organizations. It is the method which consists of the determination and the evaluation of the investments and the possible expenses by an organization. As explicate by Lee, Johnson, & Joyce (2008), capital budgets help in determining how much of each form of investment is needed, and it supports an organization in assessing the available revenue which includes loans is required to finance those investments (p. 475). Capital budgeting is a central part of the universal
Capital assets are generally purchased to improve quality of care, or to provide needed equipment for a new service or expansion of an existing service. The key element in capital budgeting is that the building or piece of equipment being acquired has a lifetime that extends beyond the year of purchase and it is a capital asset or long-term investment for the hospital. Capital assets are good financial investments for the organization.(Finkler, Ward, & Baker, 2007). The Electronic health record software system is one of the important operational priorities in the US healthcare. The change from paper-based record system to electronic record system supported by technologies and help for reducing errors and
As a result, to promote the financial health of any organization one should know the present value of the investment and have a good ideal of how long that investment will take to mature and give back returns. In order to create a capital budget I have to consider the needs of the organization, look at the finances, goals, and position that the business is. In doing I could make a decision about the needs of that business. Second, I would have to collect, compare, analyze, and evaluate the cash and financial statements in order to compare the cost and revenue. It would give me some lead way into the position of the business when it moves forward to the future. Third, the capital budget would have to be compared to the cash flow, because it will help me to know how important it is to make the investment only if it increases the financial bottom line and increase the total financial performance of the business. I can use the
Healthcare organizations have a way of handling the issues of the capital structure. The policy of the optimal capital structure in a health institute ensures that the financial strength of the company is obtained. Health organizations need to fund their projects for the sake of smooth running of the activities. However, some of them cannot be able to sell stocks to the public since they are non-profit organizations. Capital structure is a dynamic aspect; instead of static. It depends on the socio-economic sector and the conditions the company is operating in. there are three first types of approaches an organization can take when it comes to the optimal capital structure. It has to do with the balancing between equity and debt.
In Clarke’s et al (2004) article “Inside the real world of capital allocation”, Jeff Costello the vice president and CFO of Memorial Health System Inc. emphasizes on segregating capital budget into several categories which he labeled as a “strategic capital”. Hence, of all his suggestions, the concept
Finance: Evidence from the Field” in the Journal of Financial Economics Vol. 60, 2001, pp. 187-243.
The Chief Executive Officer (CEO) is the senior leader that promotes the mission and value of a HealthCare Organization (HCO). Then, when it comes to the finance budget, the budget office “coordinates the budget development and accounting reports, working closely with internal consulting and managing the extensive flows of information necessary to support the negotiations” (White and Griffith 423). The CEO recognizes that to develop a Long Term Financial Plan (LTFP) it takes several months involving everyone in the HCO. The objective is to find the best option for an Opportunity for Improvement (OFI) and Performance Improvement Teams (PIT) to thrive for excellence. The budget goals are determined by capital requests that are separate from
It is probably safe to assume that most households run on a budget and some amount of forecasting, as there are many individuals who might not have an unlimited supply of money. Decisions are made about paying household bills in relation to the income that has been generated. Then comes a point in time when one realizes a need to invest in a home improvement project, this results in an analysis of the finances such as, the expense and benefit of the project. Company’s do the same thing except on a much larger scale. Individuals within a company have to take into consideration some of the same things when determining if a project is applicable. This includes, revenue and expenses, in conjunction with the company’s fixed assets, all of which, assists in creating a budget and forecast of the company’s project’s potential cost and benefit, this analysis is known as capital budgeting. Authors Besley & Brigham of the text book CFIN 4, 4th Edition explain, “Thus, the capital budget is an outline of planned expenditures on fixed assets, and capital budgeting is the process of analyzing projects and deciding (1) which are acceptable investments and (2) which should actually be purchased.” (Besley & Brigham, 2015, pg. 145). Creating a capital budget and forecast that is as close as possible to the realized impact is essential, it should illustrate a true picture of investments anticipated outcome, review the below scenario and see how this concept can quickly change under pressure.
The objective of Eric La Flèche, President and CEO of Metro Inc., is to determine the company’s optimal capital structure for short and long-term success. Metro’s debt-to-equity ratio is currently not optimized, leaving the company to miss opportunities for leveraged growth. Additionally, its credit risk must be handled appropriately to ensure future flexibility when executing on opportunities in capital markets.
Capital Budgeting (otherwise called venture evaluation) is the most critical instrument in corporate account to figure out if an organization 's long haul speculations are advantageous or not. It is otherwise called speculation a Working capital are the assets important to bolster the operation of the enduring resources. Different cases will be utilized to outline Capital Budgeting methodology is the path toward orchestrating and controlling capital utilization inside a firm. Capital Budgeting is over a period more unmistakable than the period considered under a working spending arrangement. Capital arranging incorporates the mission for sensible hypothesis open entryways; case, (for instance, placing assets into R&D, opening another
Return on investments is the glue to holding businesses and health care organizations together and receive a return on profit. Accountants, financial executives, and senior management must demonstrate key knowledge to handle high-priority financial data and making reports. It’s a constant need to stay up to date with finances, statistics, accounting, and economics. The five prior return on investment phases are the building blocks to construct the final project paper. The consolidation of the five phases will organize and portray the overall picture of the importance of report on investments and how the whole concept can reach an organization’s potential. Endless possibilities are with return on investments to gain profit in a for- or not-for profit health care organizations for management and steady growth. The long-term benefit of return on investments is achievable when knowledge, leadership, teamwork, and monitoring the expectations of ROI are met.
Capital budgeting is the most important management tool that enables managers of the organization to select the investment option that yields comprehensive cash flows and rate of return. For managers availability of capital whether in form of debt or equity is very limited and thus it become imperative for them to invest their limited and most important resource in perfect option that could prove to beneficial for the organization in the long run (Hickman et al, 2013). However, while using capital budgeting tool managers must understand its quantitative and qualitative considerations that are discussed below.
This article mainly discusses the cost of capital, the required return necessary to make a capital budgeting project worthwhile. Cost of capital includes the cost of debt and the cost of equity. Theorist conclude that the cost of capital to the owners of a firm is simply the rate of interest on bonds.
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm 's capital structure is then the composition or 'structure ' of its liabilities. Simply, capital structure refers to the mix of debt and equity used by a firm in financing its assets. The capital structure decision is one of the most important decisions made by financial management. The capital structure decision is at the center of many other decisions in the area of corporate finance. These include dividend policy, project financing, issue of long term securities, financing of mergers, buyouts and so on. One of the many objectives of