CHAPTER 27 Financial Management in Not-for-Profit Businesses For-profit (investor-owned) vs. not-for-profit businesses Goals of the firm What are the key features of investor-owned firms?
Financial Management inNot-for-Profit Businesses
What are the key features ofinvestor-owned firms?
What is a not-for-profit corporation?
What are the major control differences between investor-owned andnot-for-profit businesses?
How do goals differ between investor-owned and not-for-profit businesses?
Is the WACC relevant to not-for-profit businesses?
Yes. The WACC estimation for not-for-profit firms parallels that for investor-owned firms.
Is there any difference between the WACC formula for investor-owned firms and that for not-for-profit businesses?
What is fund capital?
Not-for-profit firms raise the equivalent of equity capital, called fund capital, by retaining profits, receiving government grants, and receiving private contributions.
How is the cost of fund capital estimated?
Is the trade-off theory of capital structure applicable to not-for-profit businesses?
Is the asymmetric information theory applicable to not-for-profit businesses?
The asymmetric information theory is not applicable to not-for-profit firms, since they do not issue common stock.
What problems do not-for-profit businesses encounter when they attempt to implement the trade-off theory?
Why is capital budgeting important to not-for-profit businesses?
What is social value?
Social value are those benefits realized from capital investment in addition to cash flow returns, such as charity care and other community services.
How can the net present value method be modified to include the social value of proposed projects?
Which of the three project risk measures--stand-alone, corporate, and market--is relevant to not-for-profit businesses?
What is a corporate beta?
How does a corporate beta differ from a market beta?
A project’s market beta is a similar quantitative measure of a project’s market risk, but it measures the volatility of project returns relative to market returns.
How is project risk actually measured within not-for-profit businesses?
What are municipal bonds?
How do not-for-profit health care businesses access the municipalbond market?
What is credit enhancement, and what effect does it have on debt costs?
Credit enhancement is, simply, bond insurance that guarantees the repayment of a municipal bond’s principal and interest.
When issuers purchase credit enhancement, the bond is rated on the basis of the insurer’s financial strength rather than the issuer’s.
What are a not-for-profit business’s sources of fund capital?
What impact does the inability to issue common stock have on a not-for-profit business’s capital structure and capital budgeting decisions?
What unique problems do not-for-profit businesses encounter in financial analysis and planning and short-term financial management?