Question

you have recently been appointed as a board member to the Hospital System. You are a labor law attorney who has worked for the hospital for nearly 10 years. Now, you must help to determine whether the hospital should consider a bond to finance a major hospital renovation bond.

• Identify the factors you believe to be most critical to consider during this renovation bond decision.
• summarize your decoision

Answer 1

The factors to be considered to be most critical while taking decision for a major hospital renovation bond issue:

Return on capital: The hospital’s return on the capital invested is the most important factor because issuing bonds will invite interest expense so the hospital should have higher earning rate than rate of interest.

Bond maturity: Bonds issued are to be paid back to the investors so the hospital’s cash flow in the coming years has to be considered to decide the maturity of the bonds.

Type of Bond: The convertible bond are always helpful in case the hospital would not have enough cash flow at the time of repayment of the bonds.

Interest rate: The interest rate payable on the bond has to be decided whether on fixed rate or floating or zero rate. This will depend on the yearly cash flow to the hospital.

Issuing price of the bond: While issuing bonds, the issuing price has to be considered. If hospital is paying higher rate of interest to the market rate, than the bonds should be issued at premium, otherwise it would be issued at par or at discount.

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