CHAPTER 9

Costs and Sources of Capital

9.1 Healthcare Financing Options

9.1.1 History of Healthcare Financing

9.1.2 Sources of Financing

9.2 Cost of Capital

9.2.1 Estimating the Cost of Capital

9.3 Conclusion

9.4 Key Sources

9.5 Acronyms

Regardless of which of the income-based methodologies is used in the valuation process, a key parameter that must be determined is the appropriate risk-adjusted rate of return used to discount the future expected economic benefits accruing to the owners of the entity/asset under analysis. All income-based approaches attempt to express these future economic benefits, such as cash flow or cost detriments, in present day (as of the date of the valuation) terms. Specifically, the current owners of capital will expect compensation for postponing their enjoyment of their ownership of capital, as well as compensation to reflect the relative uncertainty of actually receiving those future benefits. These two concepts are central to understanding the cost of capital faced by healthcare entities.

9.1 HEALTHCARE FINANCING OPTIONS

Financing can be achieved through (1) debt, (2) equity, or (3) internally generated surpluses from revenue. Healthcare financing includes various financial instruments from short-term financing, taxable long-term financing, and tax-exempt bond financing to private and public equity markets. Choosing the optimal combination of each of the sources of capital depends on the size and makeup of the organization and what types of financing ...

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