Explain the calculation and interpretation of the cost of capital. In your response, consider how this cost impacts a health care manager’s decision on expansion of services, etc. On two different paragraph give your personal opinion to Daron Newton and Lawrence Holmes with a total of two pages.
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As we continue to discuss how finances impact the healthcare system. Cost of capital is a strategy that managers will need to conduct when it comes to making investment decisions. Cost of capital is defined as the cost of opportunity of all capital invested in any organization (Expectations Investing, N.D.). In this online tutorial, it provides the basic steps on how to calculate the cost of capital when it comes to investing. In relating this article to how this could impact a healthcare organization. Financial managers have to take into account the weight of each capital as it pertains to the organization. According to EI, most capital comes from either debt that a company has or the equity that has been built up within the company (EI, N. D.).
The second step is the structure of the capital and how it’s positioned out, and the last step is weighing the components of each capital (EI, N. D.). So for instance, you have a hospital who is looking to expand its services and they are looking to purchase another facility. The manager will have to look at the cost of all the hospitals capital and make the appropriate calculations by using the steps to determine if the risk of the capital makes sense to invest in purchasing another facility. So as you can see, the cost of capital is very important and those decisions must be made wisely or the organization could face potential financial setbacks.
Rappaport, A., Mauboussin, M. (N.D.) How to Calculate a Company’s Cost of Capital? Expectations Investing. Reterived from http://www.expectationsinvesting.com/tutorial8.shtml
Like every business cost of capital is the most important part of an organization. The organization looks at the rate at which the organization can raise funds for varied investment activities, like expanding services, products which feeds the demand or improvement to facilities. Management determined through evaluating the different sources which funds are available to a organization like equity funds, debt from a banking institution, debt from the debt market. what we need to lookout for is cost of capital, in other-words calculate the entire organization or a division of the organization or create a new product which fill the needs of the consumer LCG (2012). But when we look at expanding the services, you must look at the decisions management must make. Less take for interest the upper management is looking at expanding the health care department services which provide organizations, he or she needs to evaluate the quantum of funds needs to be invested for proposed expansion as well as the support cost of these funds LCG (2012). How this is accomplish is through evaluating the cash inflows from expansion at the cost of capital and determining if the overall add a positive value to the organization. According to Louis C. Gapenski (2012) ” When actual results fall short of these specified in the budget, managers use variance analysis to identify the areas that caused the sub par performance. In this way managerial resources can be brought to bear on those areas of operations that offer the most promise for financial improvement”.