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Alternative working capital policy - Essay Example

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The first option is tax-exempt revenue bonds that are issued only for specific projects as it the case with the hospital, aimed primarily for developmental projects and related initiatives…
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Alternative working capital policy

Download file to see previous pages... btain funding through this method is that EHC should have an average operating margin greater then 0% over the last three years along with a debt coverage ratio greater than 1.25x. the third option is to go for sourcing investment from private banks, which obviously come with a higher rate of interest (4.50%) compared to the other available options. Further, there is a difference in prepayment limitations in this case at 2% of the principal amount.
The inflow from operating activities totaled nearly $50 million. However, the high operating expenses to the tune of $40 million means that EHC is left with a mere $497,000 in terms of net income. This is insufficient to fund the proposed expansion worth $75 million nor is it adequate to manage the related loan repayment increases in case the required funds are sourced from outside.
The cash conversion cycle (CCC) will help determine the period up to which EHC will not be able to seek cash in case an increase in investment towards expansion is initiated in a bid to offer a wider range of services. CCC is this a measurement of the liquidity risk associated with any proposed initiative towards growth.
Clearly, CCC is negative which means EHS is highly dependent on collecting cash from customers before paying suppliers and for the maintenance of equipment. Although this represents a strict policy of collections, this approach is not sustainable in the long run and the company will not be able to consider any expansion in this setup.
Amongst the three options available, it is recommended to opt for low tax revenue bonds as it comes with a manageable rate of interest and moreover, such bonds come from governmental bodies, thereby having the least risk associated with them. the advantage of a revenue bond also arises from the fact that repayment is done solely from the revenues generated by the new expansion, which will facilitate easy book keeping and have the least influence on EHC’s management of existing ...Download file to see next pagesRead More
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