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Managing risk through a global capital strategy. Financial situations of hospitals (especially in US) - Research Paper Example

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This paper looks at the financial situations of hospitals (especially in US) and suggests that new market structures after the financial crisis of 2007-2008 call for different and improved risk management measures and the effect of debt on its capital structure…
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Managing risk through a global capital strategy. Financial situations of hospitals (especially in US)
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Download file to see previous pages Back in 1958 in the Economic Review Modigliani and Miller proposed two very different optimal capital structures and since then there has been much debate going on as to what exactly is an optimal capital structure. Their first proposition concludes that in economic equilibrium conditions and perfect capital markets on which there is no tax liability, a firm is independent of an optimal capital structure to maximize its value. Five years after that, in 1963, they propose a different theory stating that introduction of corporate taxes provides a tax shield for debt that can escort a firm that is financed with 100% of debt. This props further questions like; aren’t firms wasting tons of money in tax payment to underuse debts (assumptions are; bankruptcy costs moderately) or other factors can take part in diminishing debt’s tax advantage? One such factor is the personal-corporate tax interaction where slightly different treatment of equity and debt (at personal level) that lessens the observed debt value. Corporate tax advantage is fractionally balanced by personal tax disadvantage by paying interest payments (Miller, 1977). The good thing is it confirms to both Miller and Modigliani. If there are no tax disadvantages then debt level returns back to the levels defined back in 1963. On the other side, advantages of debt get terminated by terminating personal equity tax. Personal income tax rate becomes equal to marginal corporate rate while suffering losses at corporate level. Probably in the long run, a capital structure under these forces may not be of much help in explaining the phenomenon of optimism but when tax code and variations are considered, business risks help explain the short term optimal capital structure of a firm. The capital structures constructed by health care providers have both negative and positive effects on the hospital business and success of organization. These capital structures built by combinations of debt and equity are now relatively modified as compared to previous decades’. In the aftermath of financial crisis of 2007-2008, the volatile situation of stock market, interest rate indexes, innovations in financial products especially in OTC markets for bonds and derivatives and changing dimensions of credit markets present a new challenge for providers. Specification of thesis – main point  What is an optimal capital structure and what are the ways to determine an optimal capital structure of a firm? And how risk can be managed through a global capital structure? Risk is present all the time, in capital markets, which affects the capital structure of firms. So instead of avoiding it, a better strategy is to have well managed capital strategy in place. c) Three supporting opinions/reasons  1. Enterprise Risk Management Balance sheet risk management will always remain most important in overall financial risk management. A well established and well operated risk management for treasury practices is the major force in mitigating the financial stress of a balance sheet risk. Hospitals and health care facilities have different profiles and risk/return objectives with different market share and risk exposures, therefore there isn’t a standard capital structure that fits all. Every hospital and health care facility will need to have their custom made. One move that definitely fits almost all health care providers is to have a global capital strategy. A strong liquidity packed with position low forward capital needs would probably call for floating rate debt and appropriate interest rate ...Download file to see next pagesRead More
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