Capital Budgeting Process
Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps.
In order for an organization to issue bonds, there are six steps to be followed. In this case, the borrower i.e. the health care needs to analyze its debts capacity, drafts the capital plan with up to date data, and gets its house together i.e. the borrower (the health care) decides the parties who are to be included in the bond issuance. Once the decision is made, the borrower further checks with the credit rating agency. The credit rating agency analyzes the bond and evaluates its value.
The agency rates the bond. The borrower then forms a loan agreement with the government authority responsible for the issuance of bond under legal terms. After the issuance, bonds are traded by the underwriters through public offering at the given price. Thus, the trustee provides the net proceed from bonds sales to the health care.
An alternative to traditional equity and debt financing is leasing. Leasing is undertaken primarily for what purposes?
Another means of increasing the capital investment in the company is through leasing. Leasing is done by organizations to safeguard the company from buying a new equipment which depreciates over time. It protects an organization from negative equity. It enables the company to uses resources at lower cost.
Additionally, the other reason is the low-interest rates charged through leasing loan as compared to that of bank loan. In terms of bank loan, the interest is high while the principal is not reduced through periodic interest.
Discuss the two major types of leases.
There are two major types of leases. Firstly, the one type of lease is the capital lease. A capital lease is based on long-term lease agreement especially, for items that are not obsolete because of technology. It can include types of machinery. This type of lease provides lessee i.e. person who is leasing the resources, with several advantages as well as disadvantages related to the ownership. The resources are the assets, which are subject to depreciation. This type of lease is the debt to the lessee.
Secondly, the other type of lease is operating lease. It is more inclined towards service leases, which are for the shorter time period. This is done in the case of high-tech equipment or as a result of technological changes. The lessee mainly uses the property for their purpose without any ownership. The lessor retains the ownership in this case (Murray, n.d.). In this case, there are rental costs attached to leasing which is also known as operating expenses.
Discuss the terms short-term borrowing and long-term financing.
The key difference between the short term borrowing and long term borrowing is the duration of time in which the obligation remains outstanding. The payback period is less in the short term while for the long, it extends for years. Generally, the short-term financing has a loan term of less than one year while for long term financing; it has a loan term greater than one year (Masters & Skola, 2013).
It becomes crucial to differentiate between the two financing as they are treated differently for accounting and tax purposes. In the case of long-term financing, these long-term liabilities have multiple year payment terms.
What are the primary sources of equity financing for not-for-profit healthcare organizations?
Equity financing refers to a long-term source of financing. Every organization seeks for long-term finances in order to develop the business despite being a profit or not for profit organization. In the case of not for profit organization, these include hospitals, universities, and health care systems. These organizations mainly raise capital through tax-exempt bonds to match their increasing demand in the service sector, enhance their existing technologies, and upgrade their facilities.
Additionally, the other source of equity financing can be raised through government grants and charities. These healthcare organizations are under the regulation of the federal government to provide adequate facilities to the general population (Equity in Not-for-Profit Businesses, n.d.). Such not-for-profit organization receives the startup equity from various bodies such as religious, educational and governmental entities. Even after years of operation, the funds are provided by these entities. However, after the 1970s, these organizations are based heavily on the profit generated and other funds from outside agencies.
The capital budgeting process occurs in several stages, but generally, includes what?
While considering the capital budgeting process, the first step is to identify the available opportunities for the company. After determining reasonable opportunities, the second step would be to analyze the best one for the company. Furthermore, the project needs cash to be implemented. So, it becomes crucial to decide the amount of cash needed to carry the project. The process is mainly based on estimation and prediction. After analyzing several alternative projects, the company can select the right mix of the project that can be adopted by the company. It is also important to evaluate the pros and cons of each project. Following the selection process, the project mix needs to be implemented. The implementation does not fall under the budgeting issue. But, it is vital to understand every aspect to find any flaws in the planning. Once the project formally commences, the company needs to go through the in-depth evaluation process to determine the validity of the finances.
Discuss There are many other valuation techniques besides the DCF approach which are commonly used.
There are several other methods used beside the DCF approach as using many approaches will enable to enhance the reliability and validity of the results. The commonly used method is trading comparable analysis.
Using this method, the company draws a list of the group of companies, which have similar standard industry classification (SIC), as well as other similarities such as geographic focus, financing structure, and market segments.
In the case of the DCF method, it focuses on Net Present Value (NPV) of future cash flows. The cash flows are discounted using appropriate discount rates.
References
- Equity in Not-for-Profit Businesses. (n.d.). Car Free DC. Retrieved March 30, 2014, from http://www.carfreedc.info/2008/09/equity-in-not-for-profit-businesses
- Masters, T., & Skola, S. (2013). What Are the Differences Between Long-Term and Short-Term Financing?. WiseGeek. Retrieved March 30, 2014, from http://www.wisegeek.com/what-are-the-differences-between-long-term-and-short-term-financing.htm
- Murray, J. (n.d.). What is the Difference Between a Capital Lease and an Operating Lease?. About.com US Business Law / Taxes. Retrieved March 30, 2014, from http://biztaxlaw.about.com/od/financingyourstartup/a/capoplease.htm
