Running head: Capital Budget

Capital Budget
Margarita Perez
6/1/16
HSM 340: Essentials of Health Care Finance
Professor: John Jabbour
DeVry University

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Capital Budget
Six step process an organization takes to issue a bond?
Organizations that decide to issue bonds follow a six steps process but first the issuer
needs to select counsel, the underwriter and or a financial advisor. Both participants the issuer
and the solicitor work together to structure the financing. Meanwhile answering four
fundamental questions. Such as, (1) what purpose is it to fund a capital project, refund prior debt,
and or both? (2) What are the legal guidelines involved does the capital project serve a proper
legal purpose, under the federal tax rules can the debt be refunded? (3) How should bonds be
sold, through arbitration with one underwriter or through a request procedure with multiple
insurers? (4) Can credit improvement make economic sense that is, the insurance cost or letter of
credit is much less than the resulting debt service savings to the issuer? Once the financing
structure is formulated the issuer can begin by selecting the paying agent or trustee and the credit
enhancer, then all partners can start to prepare the required documentation. (Unkovic, D. &
Ewing, S., LLP. 2016).
The disclosure document usually called the preliminary official statement prepared by the
underwriter or the financial advisor. Furthermore, the Bond counsel drafts the ordinance or
settlement and other legal documents. Once the initial documents are in proper form, distribution
begins to all potential purchasers. Also, take note that the marketing period will stay open for one
week. After the end of the one week, the issuer holds a public meeting at which time the bond
sale begins. If the issuer decides to negotiate an offer with one underwriter, then the insurer is
attended the public meeting with a solid purchase proposal. On the other hand, if the issuer
chooses offerings with bids from several underwriters then the financial advisor collects these
requests on the day of the public meeting. (Unkovic, D. & Ewing, S., LLP. 2016).

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A purchase proposal of a bond issue contains specific terms such as interest rate, the
principal amount of the bond, and a schedule and prepayment provisions. Once it's a done deal,
the participants can start the closing procedure. If it so happens that the issuer is a school district
or a municipality, then the bond counsel takes a different approach by preparing to file "with the
Pennsylvania Department of Community and Economic Development." (Unkovic, D. & Ewing,
S., LLP, 2016). The department then will have 20 days to accept the bond issue. After the bond
sale, there is a 30 day period to close the deal. Before closing, the bond counsel will provide
forms for reviews such as various drafts of agreements, certificates, and legal opinions. In the
end, all participants will execute the various closing documents. Once completed the underwriter
wires the information to the paying agent in regards to the purchase price of the bonds. At the
permission of the issuer the paying agent, pays all costs of issuance and applies the remaining
balance to fund a construction fund or to refund the prior debt. After the bond issue has closed
the bond counsel distributes a complete set of the closing documents to each participant.
(Unkovic, D. & Ewing, S., LLP. 2016).
Alternative to traditional equity, debt financing is leasing. Leasing undertaken why?
When an organization is paying for the cost of doing business, managers will need to rely
on one of three options: financing costs with revenue, seeking out new investors or borrowing
against assets. In fact, a successful business tends to borrow as little as necessary, and sometimes
uses lease financing arrangements to avoid new debt, or to secure lower financing costs. Lease
financing is somewhat like taking on new debt but has some significant differences that should
be clearly understood when considering this. Debt and equity, the most common sources of
capital in the business, is borrowing from creditors and securing investments from owners or
partners. Debt and equity have several advantages and disadvantages. For instance, debt

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financing is at times more preferable for short-term costs and obligations. The reason is must be
paid back with interest and does not usually convey an ownership claim to the business's assets
or future profits. With equity financing is mostly used for long-term investments in capital
goods, because the investor continues to hold an on the ownership interest. (Petryni, M., 2007).
Leasing is more of a finance arrangement where a lender will provide a loan as they
would in an average debt, the difference is they also get an ownership interest in the business's
assets. Finance leases usually set up, so a company sells one of its primary assets to an
investment company, who in exchange provides them with cash. The business then arranges to
rent the asset from the finance company for the duration of its useful life. Also, the cost of capital
from a lease is often cheaper, and one can enjoy the added security of owning the asset.
Economic evidence suggests that lease financing and debt financing are used as alternatives to
one another, although businesses often combine a balance between debt, equity and lease
financing. (Petryni, M., 2007).
Leasing has undertaken for the simple fact that rental property works ideally for
businesses that technology is constantly changing. Investing in equipment that will become no
use in a few years is a problem that can avoid by short-term leases that allow you to update your
equipment at the end of each lease. If your gear needs regular maintenance or breaks down
quickly, with a maintenance and repair contract included can be ideal for buying equipment in
fact, in the long run, the company will save money and worries. (Chron., 2016).
Discuss the two major types of leases?
There are many types of leases, but there are two major types first there is the operating
lease and second the capital finance lease. The operating lease is a short-term loan that must be
paid back with-in or less than one year. A conventional short-term loan is a payday loan. Payday

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loans are convenient for unexpected emergencies; typically these short term loans are much
easier to be approved and have funds directly deposit into a bank account with-in 48 hours. Also,
a short-term loan carries a much higher interest rate. Second, the capital finance lease, known as
long-term loans that have an extended period to be paid back. These long-term loans are
typically mortgage, home improvements, weddings, and school loans. Long-term loans are much
difficult to get approved, being these loans are granted from institutions such as banks and or
credit unions. The approval standards are much higher such as one's credit score, the past and
recent credit history must be in good standing and current income. (Murray, J., 2015).
Leasing equipment is another way seen to purchase. Each primary lease used for different
purposes. Operating leases, known as service leases, can provide both financing and
maintenance. For example, IBM well known of operating lease contracts, such as computers and
office copying machines, together with medical diagnostic equipment and vehicles, are the
primary types of the material involved in operating leases. Operating leases may require the
lessor to maintain and service the leased equipment by having the cost maintenance built into the
lease payments. The difference between operational leases and finance capital leases is a
financial lease will lease business equipment that reflects as an asset that represents ownership to
the organization. Because it is considered assets, capital leases may be eligible for depreciation.
In fact, before entering into a capital lease, one should be sure it meets the criteria to be
depreciable by checking with a tax adviser. Operational leases are the property but does not take
on the benefits or drawbacks of ownership, which are retained by the lessor. (Murray, J., 2015).
Discuss the terms short-term borrowing and long-term financing?
The difference between long-term and short-term financing is primarily in the length of
time the debt obligation remains outstanding. Short-term financing involves a loan term that is

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typically less than one year. Conversely, long-term funding is any debt obligation with a loan
term that is greater than one year. The distinction is important for accounting and tax purposes.
Long-term financing, also known as long-term liabilities, are debt obligations that have multiyear payment terms. (Masters, T., & Skola, S. 2013).
Primary sources of equity financing for not-for-profit healthcare organizations?
Equity Financing is said to be one of the sources of the long-term finance. Every
company needs the long-term funding for the development of its business, whether it may be a
Profit Organization or a not for profit organization. Not-for-profit hospitals and healthcare
systems still rely on tax-exempt bonds as the primary source of external capital to finance the
growing need for services, updated facilities and new technology. Not-for-profit firms can raise
equity capital through government grants and charitable contributions. Federal, state and local
governments are concerned about the provision of healthcare services to the general population.
Most not-for-profit hospitals received their initial, start-up equity capital from religious,
educational, or governmental entities, and today some hospitals continue to receive funding from
these sources. Another way non-profit hospitals have been accessing capital is through
partnerships with for-profit hospitals or health systems. For example, if a for-profit and nonprofit health system plan a joint venture, which would convert the for-profit hospital.
Relationships between for-profit and non-profit healthcare organizations can benefit both groups
by providing the non-profit system with needed capital and providing the for-profit system with
added resources. (Beckers Hospital Review, 2011).
Capital budgeting process occurs in several stages, generally includes what?
According to Prentice Business Hall Publishing, Cost Accounting, Capital budgeting is
the making of long-run planning decisions for investments in projects and programs. It is a

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decision-making and control tool that focuses primarily on projects or programs that span
multiple years. Capital budgeting is a six-stage process. Identification stage, Search stage,
Information-acquisition stage, Selection stage, Financing stage and lastly Implementation and
control stage. With Assisted Living, the primary goal is to improve the diagnostic capabilities of
its facility. Management identifies a need to purchase new equipment. Management focuses on
one particular machine. Meanwhile, the search stage yields several alternative models. (The
Basic Steps of Capital Budgeting).
Discuss three discounted cash flow methods?
Business valuation, market approach is set in the profitability theory of competition. The
free market, with high demands and supply effects, directs the value of business properties to a
particular balance. Ability to Pay, Leverage Buyout/ Analysis (LBO): Valuing an organization,
assuming the recovery of the group via a leveraged buyout, which uses a particular sum of
borrowed money to fund the items and presuming a required rate of return for the purchasing
entity. In fact, there are two other discounted cash flow technique used which is the Comparable
Company Analysis, this evaluates other, similar companies' their current valuation metrics,
determined by market prices, and applying them to the company being valued. Also the
Precedent Transaction Analysis takes a look at past prices for completed M&A transactions that
contain similar companies to get a range of valuation multiples. This analysis attempts to arrive
at a "control premium" paid by an acquirer to have control of the business. (Streets of Walls,
2013).

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References
Chron. Small Businesses. (2016). Debt Financing Vs. Lease Financing. Retrieved from
http://smallbusiness.chron.com/debt-financing-vs-lease-financing-37266.html
Masters, T., & Skola, S. (2013). What Are the Differences between Long-Term and Short-Term?
Financing? Wise Geek. Retrieved from http://www.wisegeek.com/what-are-thedifferences-between-long-term-and-short-term-financing.htm
Murray, J. (2015). What is the Difference between a Capital Lease and an Operating Lease?
About.com US Business Law / Taxes. Retrieved from
http://biztaxlaw.about.com/od/financingyourstartup/a/capoplease.htm
The Basic Steps of Capital Budgeting. (n.d.). - Financial Web. Retrieved from
http://www.finweb.com/financial-planning/the-basic-steps-of-capitalbudgeting.html#axzz2mAOLlKIi
Petryni, M. (2007). Demand Media. Debt Equity Finance vs. Lease Finance. Retrieved from
http://wiki.fool.com/Debt_Equity_Finance_vs._Lease_Finance#Debt_and_Equity_Financ
ing
Rodak, S. (2011) Beckers Hospital Review. Alternative Sources of Capital for Hospitals.
Retrieved from http://www.beckershospitalreview.com/hospital-managementadministration/6-alternative-sources-of-capital-for-hospitals.html
Streets of Walls. Valuation Techniques Overview of Investment Banking Technical Training.
Retrieved from http://www.streetofwalls.com/finance-training-courses/investmentbanking-technical-training/valuation-techniques-overview/
Unkovic, D. & Ewing, S., LLP. (2016). Anatomy of a Bond Issue. Find Law for Legal

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Professionals. Retrieved from http://corporate.findlaw.com/business-operations/anatomyof-a bond-issue.html