Question

In: Finance

Is it better for a hospital to obtain cash for expansion through debt financing or equity...

Is it better for a hospital to obtain cash for expansion through debt financing or equity financing?

Solutions

Expert Solution

Selection of a capital structure is based upon multiple factors as to whether a company wants to dissolve it's control and equity to obtain fund through equity financing or a company wants to go for debt financing as it is a cash rich business and produces enough profits to deal with periodic repayments of debts.

In case of hospitals, It is better to opt for debt financing as debt finance is for companies which are high on cash inflows and companies who are able to generate enough cash to deal with the periodic repayments at the regular intervals. Hospitals are highly liquid and cash rich business and debts are suitable for them as offers with no dilution of control and equity is not liquidated. It only requires a periodic repayments and bears a credit risk .

Hospitals should opt for debt financing as it also offers with tax savings also called as interest rates shield as their intetest is tax deductible while the payment made to the equity shareholders in form of dividend is taxable so debt is also preferable in this regard.

Debt is also important when a firm is able to generate a high rate of return on it's investments which is greater than the cost of debt so use of debt in such scenarios is always beneficial for hospitals if they are generating a high rate of return on investment.

So, Keeping all the factors in mind, according to my opinion a hospital should opt for debt financing.


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