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Capital Structure Decisions

Consider the following scenario:

You are the Comptroller for a healthcare organization and you are tasked with analyzing potential scenarios regarding their funding.

Problem #1: Changing Debt & Interest Rates

• They      have an operating income of 1,500,000 SAR
• They      have assets of 7,500,000 SAR
• The      Tax rate is 22.5%
• They      currently do not have any debt but are considering the following      scenarios:

Scenario A

No debt

Scenario B

Interest rate 9.5%

B1 increase debt to 2,500,000 SAR

B2 increase debt to 5,000,000 SAR

Scenario C

Interest rate 12.5%

B1 increase debt to 2,500,000 SAR

B2 increase debt to 5,000,000 SAR

Based on the above information, address the following questions:

Compare Scenario A (no debt) to Scenario B (increasing debt 9.5% interest rate)

a. What impact does increasing the debt have on the taxable income?

1. What impact does increasing the      debt have on the net income?
2. What impact does increasing the      debt have on the dollar return to investors?

Compare Scenario B (increasing debt 9.5% interest rate) to Scenario C (increasing debt 12.5% interest rate)

a. What impact does the higher interest rate have on the taxable income?

1. What impact does the higher      interest rate have on the net income?
2. What impact does the higher      interest rate have on the dollar return to investors?

Key points

a. How does debt financing influence ROE?

1. Increasing debt can have what      impact on the amount of tax paid?
2. A higher interest rate can have      what effect on the level of taxes paid?
3. A higher interest rate can have      what effect on the dollar return to investors?
4. How does a higher interest rate      affect ROE?

Problem #2: Uncertainty

Scenario D

Zero Debt

Calculate:

a. The expected net income for each probability

2. The expected ROE for each probability
3. What the company can expect its      net income to be given these probabilities
4. What the company can expect      dollar return to investors to be given these probabilities
5. What the company can expect its      ROE to be given these probabilities

Scenario E

However, assume the company now has 5,000,000 SAR Debt

Calculate:

a. The expected net income for each probability

2. The expected ROE for each      probability
3. What the company can expect its      net income to be given these probabilities
4. What the company can expect      dollar return to investors to be given these probabilities
5. What the company can expect its      ROE to be given these probabilities

Based upon those calculations answer the following questions:

a. Does the increased leverage offer the potential of an increased ROE?

1. What impact does the increased      leverage have on the risk to stock holders?
2. Is it always a good idea to use      debt financing?

Make recommendations to the organization as to the course of action that they should follow considering all risk factors. Please make certain that you show your calculations. Submit your findings in a proposal to the hospital.

Your paper should meet the following structural requirements:

• five      pages in length, not including the cover sheet and reference page.
• You      must show all your calculations for credit. Your calculations for this      assignment must be submitted as an Excel file, identified as Appendix A,      and included as part of the Word document submission.
• Formatted      according to APA 7th edition and Saudi Electronic University writing      standards
• Provide      support for your statements with in-text citations from a minimum of six scholarly articles.

Capital Structure Decisions

Consider the following scenario:

You are the Comptroller for a healthcare organization and you are tasked

with analyzing potential scenarios regarding their funding.

Problem #1: Changing Debt & Interest Rates

• They have an operating income of 1,500,000 SAR

• They have assets of 7,500,000 SAR

• The Tax rate is 22.5%

• They currently do not have any debt but are considering the following scenarios:

Scenario A

No debt

Scenario B

Interest rate 9.5%

B1 increase debt to 2,500,000 SAR

B2 increase debt to 5,000,000 SAR

Scenario C

Interest rate 12.5%

B1 increase debt to 2,500,000 SAR

B2 increase debt to 5,000,000 SAR

Based on the above information, address the following questions:

Compare Scenario A (no debt) to Scenario B (increasing debt 9.5% interest

rate)

a. What impact does increasing the debt have on the taxable income?

b. What impact does increasing the debt have on the net income?

c. What impact does increasing the debt have on the dollar return to investors?

Compare Scenario B (increasing debt 9.5% interest rate) to Scenario C

(increasing debt 12.5% interest rate)

a. What impact does the higher interest rate have on the taxable income?

b. What impact does the higher interest rate have on the net income?

c. What impact does the higher interest rate have on the dollar return to investors?

Key points

a. How does debt financing influence ROE?

b. Increasing debt can have what impact on the amount of tax paid?

c. A higher interest rate can have what effect on the level of taxes paid?

d. A higher interest rate can have what effect on the dollar return to investors?

e. How does a higher interest rate affect ROE?

Problem #2: Uncertainty

Scenario D

Zero Debt

Calculate:

a. The expected net income for each probability

c. The expected ROE for each probability

d. What the company can expect its net income to be given these probabilities

e. What the company can expect dollar return to investors to be given these

probabilities

f. What the company can expect its ROE to be given these probabilities

Scenario E

However, assume the company now has 5,000,000 SAR Debt

Calculate:

a. The expected net income for each probability

c. The expected ROE for each probability

d. What the company can expect its net income to be given these probabilities

e. What the company can expect dollar return to investors to be given these

probabilities

f. What the company can expect its ROE to be given these probabilities

Based upon those calculations answer the following questions:

a. Does the increased leverage offer the potential of an increased ROE?

b. What impact does the increased leverage have on the risk to stock holders?

c. Is it always a good idea to use debt financing?

Make recommendations to the organization as to the course of action that

you show your calculations. Submit your findings in a proposal to the

hospital.

Your paper should meet the following structural requirements:

• five pages in length, not including the cover sheet and reference page.

• You must show all your calculations for credit. Your calculations for this

assignment must be submitted as an Excel file, identified as Appendix A, and

included as part of the Word document submission.

• Formatted according to APA 7th edition and Saudi Electronic University writing

standards

• Provide support for your statements with in-text citations from a minimum of six

scholarly articles.

SEU HCM 565
Critical Thinking Quantitative Rubric – Module 07

Exceeds Expectation Meets Expectation Below Expectation Limited Evidence

Content, Research, and Analysis

15-20 Points 9-14 Points 4-9 Points 0-3 Points

Requirements Includes all of the
required components,
as specified in the
assignment.

Includes most of the
required components,
as specified in the
assignment.

Includes some of the
required
components, as
specified in the
assignment.

Includes few of the
required
components, as
specified in the
assignment.

15-20 Points 9-14 Points 4-9 Points 0-3 Points

Balance sheet and
ROE on income
statement with
loan at 8%

All components are
correct, with no errors
or omissions.

Some significant but
not major errors exist.

Some major errors or
omissions exist.

Fails to demonstrate
comprehension of
the concept.

15-20 Points 9-14 Points 4-9 Points 0-3 Points

Balance sheet and
ROE on income
statement with
loan at 15%

All components are
correct, with no errors
or omissions.

Some significant but
not major errors exist.

Some major errors or
omissions exist.

Fails to demonstrate
comprehension of
the concept.

15-20 Points 9-14 Points 4-9 Points 0-3 Points

3 Uncertainty
calculations with
zero% and 50%
debt

All components are
correct, with no errors
or omissions.

Some significant but
not major errors exist.

Some major errors or
omissions exist.

Fails to demonstrate
comprehension of
the concept.

15-20 Points 9-14 Points 4-9 Points 0-3 Points

Recommendations
to investors

All components are
correct, with no errors
or omissions.

Some significant but
not major errors exist.

Some major errors or
omissions exist.

Fails to demonstrate