Question

Hypothetical: I am an administrator for a hospital. I am in charge of developing a new project/department specializing in outpatient corneal transplant surgery. What would be the best way to finance this project? Debt financing, equity financing, etc? And how do I go about this?

Answer 1

Debt Financing

If the firm is using loan throug Banks or raising money through Debt instruments like bonds for investment or capital requirements it is termed as Debt financing.

Equity Financing

Process of raising capital by selling part of the company to shares. This always provide the people buying the company with some level of ownership to the company.

Coming to the question, Debt financing will be always better in case if your hospital division is expected to perform well. ie: After viability check and proper analysis if you are finding that the division will provide enough cashflows to meet the interest payment obligation of the debt, you can always go for Debt financing. Also for a guarenteed business Debt financing can increase the Return on Equity to the existing investors.

Whereas if you are uncertain of the cashflow, you can raise the capital by Equity financing as there is no obligation to repay the amount to the Equity investors compare to Debt financing. Eventhough there is no obligation the overall Return on Equity will decrease for Equity financing.

PS: This is evaluatd under the assumption that your firm was Debt free before the new investment.