Question

Please answer the followings Questions in 450-words count in your own words. Please provide a spreadsheet with calculation and loss estimates and capital. The board of directors of your for-profit hospital has been approached by a nonprofit hospital to consider a joint venture to take over their business resulting in a larger for-profit medical center status. You have been asked to construct a financial risk analysis for this conversion. Using course materials, including your text and the Internet, and principles of financial risk analysis, evaluate the considerations that a nonprofit hospital has in considering the conversion to a for-profit hospital.

Consider the following options in support of your decision:

• Projected profit and loss statements

• Retention of estimates

• Selected cost of capital

• Other spreadsheets and calculations you feel are needed to support your decision

Answer 1

A profit and loss statement lists all revenue generated by the business and all expenses incurred. The difference between the totals of these two categories is the business' total profit or loss. Creating the profit and loss statement is a necessary accounting function for any business because it plainly indicates where a business is generating most of its revenue, and/or where it is hemorrhaging money in the form of expenses that are too great. It's a tool used for financial planning, as it allows the business owner to clearly see where changes are needed to bring a losing business into profitability, or to increase the profits of a business that is already profitable. Suppose the for-profit hospital earns for the suppliers of its equity capital an annual monetary return of $15 per $100 of that equity capital. That return does go to society at large because the suppliers of the firm’s equity capital are members of society (although not necessarily members of the particular community in which the hospital is located. Monetary return must cover the shareholders’ opportunity costs of investing their fund in a risk-free asset, plus a premium for the risk the owners assume by entrusting their funds to this particular for-profit hospital. The cost of equity is estimated using, alternatively, the Capital Asset Pricing Model and the Arbitrage Pricing Theory. The cost of equity capital, using either model, substantially exceeded anticipated inflation. The cost of debt capital was much lower. Accounting for the corporate tax shield on debt and capital paybacks by cost-based insurers lowered the net cost of capital to hospitals.