Healthcare Finance Chapter 13
What two inherently different types of capital do businesses use? - correct answer ✔✔Debt and equity.
Who establishes the required rates of return on debt and equity capital? - correct answer ✔✔The
suppliers.
What is capital structure? - correct answer ✔✔The structure of the liabilities and equity section of a
business's balance sheet. Often expressed as the percentage of debt financing. It is the mix of debt and
equity financing used by a business.
What is one of the most perplexing issues facing health services managers? - correct answer ✔✔How
much debt financing, as opposed to equity (or fund) financing, the organization should use.
What is optimal capital structure? - correct answer ✔✔The mix of debt and equity financing that
management believes to be appropriate for the business. Generally based on both quantitative and
qualitative factors.
Why is the asset section of the balance sheet unaffected by the financing mix? - correct answer
✔✔Because the asset requirements for any business depend on the nature and size of the business
rather than on how the business will be financed.
What part of the balance sheet does the type of financing affect? - correct answer ✔✔The liabilities and
equity section.
True or False: A business's capital structure does not affect revenues or operating costs on the income
statement. - correct answer ✔✔True. The operating income projection is the same under both financing
alternatives.
What is the best measure of return to the owners of a business? - correct answer ✔✔Return on equity
(ROE), which is net income divided by the book value of equity. It measures the dollars of earnings per
dollar of book equity investment.
, What is a possible positive benefit of using debt financing, in terms of return? - correct answer
✔✔Interest expense on debt is taken away from operating income, which leaves a lower amount of
taxable income, which can potentially increase the ROE.
What is financial leverage? - correct answer ✔✔The use of fixed cost financing; typically debt financing
for healthcare providers.
The use of debt financing reduces taxes, leaving more of the firm's operating income available for
distribution to whom? - correct answer ✔✔Investors, including owners and creditors.
While the use of financial leverage increases owners' projected return, what else does it increase? -
correct answer ✔✔Their risk.
The uncertainty in operating income produces what? - correct answer ✔✔Uncertainty and risk, in the
owner's return.
What are two key points about the use of debt financing? - correct answer ✔✔1. A business's use of
debt financing increases the expected rate of return on equity (ROE) to owners.
2. At the same time that return is increased, the use of debt financing also increases owners' risk.
How do we measure owners' risk? - correct answer ✔✔Standard deviation of ROE (stand-alone risk).
What is the Trade-off Model? - correct answer ✔✔A capital structure model that hypothesizes that a
business's optimal capital structure balances the costs and benefits associated with debt financing.
As a business uses a greater proportion of debt financing, why does the risk to creditors increase? -
correct answer ✔✔Because the greater the debt service requirement, the higher the probability that
default will occur. In essence, the greater the proportion of debt financing, the riskier the lender's
position.
Why does the cost of debt (the interest rate) increase as the proportion of debt increases? - correct
answer ✔✔Because the lender wants more compensation to assume more risk. However, the cost of
What two inherently different types of capital do businesses use? - correct answer ✔✔Debt and equity.
Who establishes the required rates of return on debt and equity capital? - correct answer ✔✔The
suppliers.
What is capital structure? - correct answer ✔✔The structure of the liabilities and equity section of a
business's balance sheet. Often expressed as the percentage of debt financing. It is the mix of debt and
equity financing used by a business.
What is one of the most perplexing issues facing health services managers? - correct answer ✔✔How
much debt financing, as opposed to equity (or fund) financing, the organization should use.
What is optimal capital structure? - correct answer ✔✔The mix of debt and equity financing that
management believes to be appropriate for the business. Generally based on both quantitative and
qualitative factors.
Why is the asset section of the balance sheet unaffected by the financing mix? - correct answer
✔✔Because the asset requirements for any business depend on the nature and size of the business
rather than on how the business will be financed.
What part of the balance sheet does the type of financing affect? - correct answer ✔✔The liabilities and
equity section.
True or False: A business's capital structure does not affect revenues or operating costs on the income
statement. - correct answer ✔✔True. The operating income projection is the same under both financing
alternatives.
What is the best measure of return to the owners of a business? - correct answer ✔✔Return on equity
(ROE), which is net income divided by the book value of equity. It measures the dollars of earnings per
dollar of book equity investment.
, What is a possible positive benefit of using debt financing, in terms of return? - correct answer
✔✔Interest expense on debt is taken away from operating income, which leaves a lower amount of
taxable income, which can potentially increase the ROE.
What is financial leverage? - correct answer ✔✔The use of fixed cost financing; typically debt financing
for healthcare providers.
The use of debt financing reduces taxes, leaving more of the firm's operating income available for
distribution to whom? - correct answer ✔✔Investors, including owners and creditors.
While the use of financial leverage increases owners' projected return, what else does it increase? -
correct answer ✔✔Their risk.
The uncertainty in operating income produces what? - correct answer ✔✔Uncertainty and risk, in the
owner's return.
What are two key points about the use of debt financing? - correct answer ✔✔1. A business's use of
debt financing increases the expected rate of return on equity (ROE) to owners.
2. At the same time that return is increased, the use of debt financing also increases owners' risk.
How do we measure owners' risk? - correct answer ✔✔Standard deviation of ROE (stand-alone risk).
What is the Trade-off Model? - correct answer ✔✔A capital structure model that hypothesizes that a
business's optimal capital structure balances the costs and benefits associated with debt financing.
As a business uses a greater proportion of debt financing, why does the risk to creditors increase? -
correct answer ✔✔Because the greater the debt service requirement, the higher the probability that
default will occur. In essence, the greater the proportion of debt financing, the riskier the lender's
position.
Why does the cost of debt (the interest rate) increase as the proportion of debt increases? - correct
answer ✔✔Because the lender wants more compensation to assume more risk. However, the cost of
