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Houston Community College *

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SOCIAL PSY

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Finance

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Feb 20, 2024

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docx

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2

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Debt vs Equity Financing A non-profit hospital may use debt financing to minimize costs in the long run since debt financing is cheaper than equity financing. A non-profit hospital may also take up debt financing in order to take advantage of tax deductions on interest payments on the debt; this will relieve their tax obligations. A non-profit hospital would also prefer taking up debt financing in order to retain control over the hospital rather than diluting ownership. On the other hand, a non-profit hospital may choose equity financing to spread the risk in case they experience financial difficulty in the future (Gray). This way, the investors will also share in the loss. They may also prefer equity financing in that there are no required regular interest rates in case of cash flow challenges in the future. Investor-owned hospitals may take up equity or debt financing to facilitate their growth and expansion. They may also take up financing for the facilitation of operations within the facility, such as salary payments, as well as paying maintenance costs (Gray). They may also take up financing to optimize their capital structure to their preference. Tax benefits may also accrue to the hospitals due to tax deductions for interest payments on loans, which reduces the hospitals' tax burden. A hospital may use both debt and equity financing for the following reasons: optimization of their cost of capital since it offers a balance between diluting ownership and interest payments. Combining both debt and equity financing acts as a risk mitigation measure since
using debt financing alone may not be sustainable for a hospital in the case of unfavorable economic conditions. A combination of debt and equity financing offers flexibility; equity financing may be used by the hospital for long-term investments, while debt financing may be used to fund operational costs.
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