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Discuss some factors that health services managers must consider when choosing between debt and equity financing.  Consider both investor-owned and not-for-profit firms

Question

Discuss some factors that health services managers must consider when choosing between debt and equity financing.  Consider both investor-owned and not-for-profit firms 

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Step 1

Before we compare and constrast debt & equity as source of finance, let's understand a bit about equity and debt separately.

Source of External Finance – Equity Finance

  • Gives investors rights to vote, share profits and residual claim on assets
  • Long-term sources of finance
  • Irredeemable in nature
  • A certificate of ownership in the company: investors are entitled to share the net profits and have a residual claim over the assets of the company in the event of liquidation.
  • Investors have voting rights in the company and their liability to the company is limited to the amount of investment.
Step 2

Source of External Finance – Debt Finance

  • A Debenture is a unit of loan amount; an acknowledgment of the loan  received by the company equal to the nominal value of the debenture.
  • A person holding debenture or  debentures  is called a debenture holder and is the  creditor of the company.
  • Bears the date of redemption and rate and mode of payment of interest.
Step 3

Debenture Holders

  • Are entitled to periodical payment of interest at an agreed rate
  • Are also entitled to redemption of their capital as per the agreed terms
  • Have no voting rights
  • Usually (but not necessarily) hold charge / mortgage of the assets of t...

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