1. Critique this statement: “The use of debt financing lowers the net income of the firm, so debt financing should be used only as a last resort.”
2. What is meant by a firm’s debt capacity?
3. Discuss some factors that health services managers must consider when setting a firm’s target capital structure. Consider both investor-owned and not-for-profit firms in your answer.
4. Is the corporate cost-of-capital estimate based on historical or marginal costs? Why?
5. What capital components are typically included when estimating a firm’s corporate cost of capital?
6. How may a firm’s cost of debt be estimated?
7. a. Why is there a cost to retained earnings in investor-owned businesses? b. What are the three methods commonly used to estimate the cost of equity? c. Is the risk premium in the CAPM the same as the risk premium in the debt cost plus risk premium model? d. How would you estimate the cost of equity (fund capital) for a not-for-profit business? e. How would you estimate the cost of equity for a small investor- owned business?
8. What is the economic interpretation of the corporate cost of capital?
9. Is the corporate cost of capital the same for all firms? Explain your answer.
10. For any given firm, can the corporate cost of capital be used as the hurdle rate for all projects under consideration? Explain your answer.