786 Index. Asset structure: capital structure decision. Associations, professional. See Professional

Transcription

1 INDEX Abandonment, 503, 513, 556; decision tree analysis of, ; definition of, 503; flexibility options for, 549; real options for, ; types of, 504 Abandonment value, 503, 504 Abnormal returns, 742 Abnormal yield curve, 233 ACA. See Patient Protection and Affordable Care Act (2010) Accountable care organizations, 7, 26 27, 737; capitated rates and, 88; chronic care conditions and, 79; shared savings and, 111 Accounting depreciation guidelines, 22 Accounting income: cash flow versus, 474 Accounting rate of return, 496 Accounts payable (trade credit), 215, 652, 674, 678; components in, 676; cost of, Accounts receivable: creating, 664, 678; pledging of, 264 Accruals, 215, 652, , 678 ACH. See Automated Clearing House ACOs. See Accountable care organizations ACP. See Average collection period Acquirer, in mergers, 707, 727 Acquisitions: business valuation and, 710; due diligence analysis and, 724; integrative application, ; of nursing homes, price ranges for, 716; regulation of, , ; valuation of potential targets for, ADS. See Average daily sales Adverse selection, 52 55, 80 Affordable Care Act. See Patient Protection and Affordable Care Act After-tax (usable) income, 13, 30 Agency problem, 9, 10, 30, 705 Agents, 9 10 Aging schedules, 667, 678; in receivables management, 667, 678 Allowable costs, 85 All patient case-mix index, 591 ALOS. See Average length of stay Alternative lenders, Alternative minimum tax, , 361 Alternative straight-line method: for calculating tax depreciation, 23 Ambulance services: Medicare reimbursement for, 100 Ambulatory payment classifications, 97 Ambulatory surgery centers, 98 American Stock Exchange, 38 Amortization, 270; financial leases and, 334; flotation cost, ; partial, 334 Amortization schedule, 160, 163 Amortized loans, , 163 AMT. See Alternative minimum tax Analysts forecasts, of growth rate, 386 Annual percentage rate, 158 Annual reports, 566 Annuities, ; definition of, 143; ordinary, , 163 Annuity due, 143, ,

2 786 Index Antitrust laws: affecting mergers, 736; enforcement of, 737; states and, 739 Antitrust regulation, 743 APCs. See Ambulatory payment classifications Appraisers, business valuations and, 711 APR. See Annual percentage rate Arbitrage: definition of, 456 Arbitrage proof, , 434 Arbitrageurs (arbs), 741 Arguments: spreadsheet programs, 133 ARR. See Accounting rate of return Arrearages, 319 Asset management (activity) ratios, Asset management ratios, 600 Assets. See also Equipment; Fixed assets; Real assets: book value of, 22, 25; capital, 16; charitable trust laws and, 708 9; claims against, 568; depreciable basis of, 23; divesting from, capital budgeting techniques and, 510; economies of scale in, 633; fixed, 6; illiquid, 230; leasing of. See Lease financing; liquid, 229; lumpy, 634, 642; mergers and purchase at less than replacement cost, 704; nonoperating, 715; permanent versus temporary, , 464 Asset structure: capital structure decision and, 450 Associations, professional. See Professional associations Asymmetric information, 53, 308 Asymmetric information model (theory): of capital structure, , 445, 446, 449; capital structure decisions and, Automated Clearing House, 655 Average age of plant, 584 Average collection period, 583, , 678; alternative calculation, 667 Average daily sales, 666 Average length of stay, 591 Average risk projects: hurdle rate for, 396, 405 Average-to-average method: of estimated growth rate estimation, 384 Bad-debt loss, 74, 95 Balanced Budget Act of 1997, 701 Balance sheets, 566, ; constant growth method/model and, 625, 628; debt financing, two alternatives, ; effect of leasing on, ; financial forecasting and, 645, 646; inflation effects and, 594 Bankers compensation: negotiating, 327 Bank loans, , 276 Bankruptcy, 224, 690; claims in, 39; direct costs of, 437; leasing and, 359 Base inventory level, 671 Bearer bonds, 238 Beating the market : market efficiency and, 310 Behavioral finance, 309 Benchmarking, , 600 Benchmark performance, 102, 114 Best-efforts sales, 327 Beta. See Market beta Beta coefficients: of a portfolio of investments, 197, 206 Bid procedure regulation, , 743 Bids: competitive, 326; preemptive or knockout, 721; price setting for, Big data, 28 Bigger fool theory of investment, 298 Billed charges, 86, 112 Billing: complexity of, 669; of uninsured patients, Biotechnology partnership: financial risk associated with, Blue Cross/Blue Shield, 57 59, 80; of California, 58; conversion to

3 Index 787 for-profit status, 58 59; of Florida, 60; reimbursement systems of, 59 Blue sky laws, 325 Board of trustees, 11, 12 Bond insurance, , 277 Bond insurers, 268 Bond ratings, 228 Bond refunding: decision process, ; interest rates and, 274 Bonds, 252. See also Corporate bonds; Municipal bonds; Revenue bonds; Treasury (T-bonds) bonds; callable, 220, 230, 246, 267; definitions of, 137, 219; general valuation model and, 237; integrative application, ; new issues versus outstanding bonds, ; noncallable, 230; payment-in-kind (PIK), 220; perpetual, 320; public offerings of, ; rate of return (total yield) on, 243; redemption prior to maturity, 267; registered, 219, 238; selling at a premium, 243, 252; selling at discount, 243, 252; with sinking funds, 222; step-up provisions of, 220; tax-exempt, 220; terminology, ; term loans and advantages over, 218; zero-coupon, 220 Bond valuation, 297; basic valuation model of, ; capital gains yield, ; coupon rate, 238, 239; interest rate risk, ; of original issue discount bonds, 245; par (face) value, 238, 239; with semiannual coupons, ; yield to call, ; yield to maturity, , 253; zero-coupon bonds, Book depreciation guidelines, 22 Book value: of assets, 22, 25, 717 Breakeven analysis, , 512; qualitative factors and, 499; time breakeven (payback) in, ; utilization (volume) breakeven, Breakup value, Bridges to Excellence, 104 BTE. See Bridges to Excellence Budget. See also Capital budget; Capital budgeting: cash, , 677; as financial control tool, 656 Build-up method: cost-of-equity estimate for small businesses, 401 3, 406 Bundled (global) pricing: description of, 87; unbundling of, 91 Bundled payment models: new, 110 Bundled payments, 109; definition of, 110 Bundled pricing: financial risk of, 94 Business activity: interest rates and, 276 Business income: taxes on, 14 Business investments: portfolio risk of, Business line diversification: capitalization rates and, 718 Business loans, 261 Business organization forms, 33 36; corporation, 33, 34 36; hybrid, 36 37; partnership, 33, 34; proprietorship, Business risk, 170, , 453; definition of, 422; factors associated with, ; illustration of, ; measurement of, Business valuation, ; assetbased approaches, 717; discounted cash flow (DCF) approach in, , 717; free cash flow to equityholders method, ; free operating cash flow method, ; going public and, 289; as imprecise process, ; integrative application, ; market multiple analysis in, 716, 717; of small businesses, , 727 Bylaws, of corporations, 35, 36 CAHs. See Critical access hospitals Calculator solutions: for annuity calculations, 146, 147; future value

4 788 Index of annuity, 144; for future value of lump sum, ; for lump-sum discounting, 136; for uneven cash flow streams, 150, Calendar-year deductible, 56 California Pay for Performance Program, Call premiums, 267, 270, 277 Call provisions, 220, , 270, 277; preferred stocks and, 323 Call risk premiums, , 252 Cancellation clause: in operating leases, 334 Cannibalization, 477 Capacity options, Capacity utilization, , 641 Capital, 235; forms of, 215, 251; partnerships and, 34; permanent, 370; working, 651 Capital Asset Pricing Model, 201, 206; basic definitions for, 201 2; comparative analysis of, 388; concerns related to, 204 5; of equity cost estimation, , 392, 405, 412, 413, 414; example of, 382; market beta measure of, 205; Security Market Line of, 202 4, 299, 300, 316, 376 Capital assets, 16 Capital budget: definition of, 551; optimal, estimation of, Capital budgeting, ; breakeven analysis in, , ; cannibalization effect and, 477; cash flow estimation bias in, ; certainty equivalent (CE) method and, 537; changes in net working capital component of, 478; definition of, 469, 511; as dynamic process, 549; financial analysis in, ; importance of, ; inflation effects component of, ; integrative application, ; in not-for-profit organizations, 505 8; overview of, 469, ; shipping and installation costs component of, ; techniques used in other contexts, ; three-step budgeting process, 506; uncertainty in initial cash outflows, 539 Capital budgeting risk analysis. See Project risk analysis Capital finance, 6 Capital gains, 16, 216, 252, 280, 722; corporate, 20; taxation of, 14, 16, 34 Capital gains yield, 252; bond valuation, Capital intensity, 632, 642 Capital intensity ratio, 632 Capital investment policy: corporate capital cost estimation and, 404, 406 Capital investment proposals. See Project(s) Capitalization rates, 718 Capitalization ratio, Capitalized cost, 22 Capitalized earnings stream, 295 Capitalized leases, 334, , 361 Capital losses, 16 Capital markets, 261; interdependence of, Capital rationing, , 557 Capital structure decisions, ; asset structure of organization and, 419; asymmetric information model of, ; business risk and, 419, ; corporate capital cost estimation and, 404, 406, 411; debt financing component of, ; effect on corporate capital cost estimation, 392; financial distress costs and, ; financial risk and, ; integrative application, ; Modigliani Miller models of, 412, ; qualitative analysis use in, ; quantitative analysis use in, 448; of small investor-owned businesses, ; summary of models, ; target (optimal) structure, 417; trade-off models of,

5 Index 789 Capital structure differentials: incorporating, Capital structure theory, 419, , , 454 Capitation, 28, 85; definition of, 87, 113; financial benefits of, 88 89; per member per month (PMPM) payments, 65, 66, 87, 88; risk sharing under, ; for specialist care, 67 68; utilization control and, 89; wellness and prevention and, 89 Capitation rate: fee-for-service, Capitation reimbursement, 109; financial incentives under, 91; financial risk under, 94 CAPM. See Capital Asset Pricing Model Carrying costs, 697; EOQ model and, Case-mix groups, 99 Case-mix values, 591 Cash: excess, mergers and, 703 4; nonearning, 652 Cash budget, 677; borrowing/surplus summary, 657, 659; collections worksheet, 657; creating, ; net cash gain (loss), 657; supplies worksheet, 657 Cash equivalents, 662 Cash flow: accounting income versus, 474; depreciation and, 21 23; financial condition driven by, 571; incremental, 474, 511; nonincremental, 476; non-normal, 498; periodic rate and, 161; project life and, 475; real, 479; relevant, forecasting of, 474; risk-adjusted discount rate analysis in, , 556; synchronization of, , 677; timing of, 128, ; truncation of, 475; uneven streams of, Cash-flow-coverage (CFC) ratio, 581 Cash flow estimation. See also Time value analysis: bias in, , 512; for capital investment proposals, 473; example of, ; general valuation model of, 236; inflation effects in, ; lease financing component of, ; net working capital component in, 478; opportunity cost component of, ; replacement analysis in, 489; strategic value and, ; sunk costs component of, Cash management: accelerating collections in, , 677; cash flow synchronization in, , 677; disbursements controlled in, , 677; float management in, , 677; matching costs and benefits of, 656; primary goal of, 652, 677 CCC. See Corporate cost of capital C corporations, 37 CDHPs. See Consumer-directed health plans Centers for Medicare & Medicaid Services, 62, 78, 97, 98, 99; pay-for-performance demonstration projects of, 103; readmission reduction program, 112; valuebased purchasing initiative of, 110 Certainty equivalent (CE) method, , 556 Certificate of public advantage laws, 739 Certificates of deposit: negotiable, 662 CFO. See Chief financial officer Charge-based reimbursement: financial incentives and, 90; financial risk of, 93, 94 Charge lag days, 668 Chargemaster, 86 Charitable contributions: as equity capital source, 292, 293, 312 Charitable organizations: definition of, 40 Charitable trust doctrine, 708 Charity care, guidelines for, 41 Charity care loss, 95 Charters, of corporations, 35 36

6 790 Index Check Clearing for the 21st Century, 654 Check-clearing procedures: float and, 654 Chief financial officer, 6 Chronic care: accountable care organizations and, 79 Churning, 90 Claims: denial of, 664; submission of, 664 Classified stock, , 330 Clayton Act, 736 Clinical integration, 28 Clinton administration: safety zone guidelines and, 737 Closely held corporations, 39, 286, 312 CMGs. See Case-mix groups CMS. See Centers for Medicare & Medicaid Services Coding: diagnosis codes, 84; fee-forservice reimbursement and, 83 85; procedure codes, Coefficient of variation, 179, 520, 530, 555 Collateral, 264; secured short-term debt and, 264 Collateralized mortgage obligations, 269 Collection policy, , 670, 688, 697; definition of, 688; rational approach to, 689 Collections: accelerating, , 677 Collections float, 653 Collection tactics, 690 Columbia clause, 710 Combination leases, 335 Commercial health insurance, Commercial paper, , 662 Commodities, 687 Common size analysis, 607 8, 611 Common stock, 38; advantages and disadvantages of, ; conversion from preferred stock, 320; market for, ; new, sale of, 283; private placements of, 284, 312; public offerings of, 284, 312; selling, Common stockholders: rights and privileges of, , 312; rights offering and, , 312 Common stock valuation, ; definitions, 295 Community ratings, Comparative analysis, 585, 593, 600 Compensating balances, 262, 276 Competitive bids, 326 Component costs: of debt and equity, 370, 404; estimating, 370 Compounding, 163; annual, 155, 156; graphic view of, ; integrative application, ; lump sum, ; power of, ; semiannual, 155, Computerized accounts receivable records, 667 Computerized financial forecasting models, , 642 Computerized inventory control systems, 671 Concentration banking, , 677 Conglomerate mergers, 706, 727 Consolidated tax returns, Consolidation of healthcare organizations, 27 Constant growth forecasting, Constant growth method/model, 312, 638, 641; assumptions about, ; expected rate of return analysis, ; expected rate of return on, ; external financing plan, ; illustration of, , 628; problems with, ; required rate of return on stock, 299; terminal value estimation and, 714 Constant growth stock: value of, Constant growth valuation model, Consumer-directed health plans, 71 75, 80; features of, 72 73; financial implications for providers, 73 74; future of, 74 75; purpose of, 71; rationale for, 73

7 Index 791 Consumer loans, 261 Contra asset account, 568 Contract management: financial management function and, 7 Contribution capital: attracting, 632, 642 Control: as bid price factor, ; business valuation factor, 719; common stock financing and dilution of, ; going public and, 290 Control interests, 719 Controlled disbursement accounts, 655 Control shares, 736 Conversion factor, 98 Copayments, 56; credit card payments for, 689 Corporate acquisitions: market for corporate control and, 741 Corporate alliances, 44 45, , 727 Corporate beta (corporate b), 191, , 197, 200, 206, 555 Corporate bonds, , 252; default on, 224; issuance of, 219; maturities of, 219 Corporate buyers: preferred stock and tax advantages for, 320 Corporate capital gains, 20 Corporate cash: raising, going public and, Corporate characteristic line, 191 Corporate cost of capital, 392, 398, 399, ; as benchmark, 396; capital components to include in, 370; contraindications to, , 405 6; definition of, , 393, 404; economic interpretation of, ; integrative application, ; permanent (long-term), 370; for real-asset investments in not-forprofit businesses, ; relationship to capital structure, 431, 432; risk-adjusted discount rate implementation model and, 540; summary of trade-off models, ; tax effects of, Corporate-cost-of-capital estimation, ; before-tax versus after-tax basis for, 393; debt cost estimation in, 394; equation for, 393; equity cost estimation in, 394; factors that do and don t influence, 403 4; for investor-owned businesses, ; of new (marginal) versus historical cost, 371; for not-forprofit businesses, 394; overview of, Corporate goals: areas within, Corporate income: taxation of, 14, Corporate insiders: SEC control over, 324 Corporate losses: carry-back and carry-forward, 20 Corporate objectives, Corporate raiders, 734, 735 Corporate risk, 206, 555; definition of, 190, 521; measurement of, ; relationship among standalone risk, market risk, and, , 539; relevance of, 198, 200 Corporate taxes, 433, 434, 435; Modigliani Miller models with, , 458; rates for 2014, 17 Corporation commissioner, 325 Corporation commissions, 331 Corporations. See also Investor-owned businesses: advantages with, 35; closely held, 39; comparison with partnerships, 35; comparison with proprietorships, 35; C-type, 37; definition of, 34; disadvantages with, 35; equity cost estimates for, ; 501(c)(3) or (4), 40; investor-owned, 34 35, 38 40; not-for-profit, 34, 38, 40 42; privately held, 39; publicly held, 38; S-type, 37 Correlation: among selected investments, 185; of portfolio returns, 183

8 792 Index Correlation coefficient, 183 Cost accounting, 7 Cost approach, 80; to insurance premium rate setting, 67 Cost-based reimbursement, 85 86; financial incentives and, 90; financial risk of, 93, 94 Cost containment: finance function and, 7 Costly trade credit, 676 Cost of capital: importance of, 369 Cost-of-capital data and calculations, 713 Cost-of-capital estimation. See also Corporate-cost-of-capital estimation: before-tax versus after-tax basis for, ; debt cost estimation in, ; equation for, 373; for large investor-owned businesses, ; of new (marginal) versus historical cost, 371; for not-for-profit businesses, ; opportunity cost component of, 392; overview of, ; permanent (long-term), 370; for small businesses, Cost of equity: to investor-owned businesses, definition of, Cost-to-collect metric, 668 Coupon interest rate (coupon rate): definition of, 238 Coupon payment: origin of term, 238 Coverage ratios, Credit availability: leasing and, Credit card payments, 689 Credit enhancement, 268, 269, 277 Credit lines, 262, 263, 276 Creditors: as interest-bearing debt source, 215 Credit period, 687, 697 Credit policy, 674, ; variables in, Credit quality, 689 Credit rating, ; bond insurance cost and, 269; criteria for, 226; importance of, 226; rating changes, Credit rating agencies: criticisms of, Credit sales, 666 Credit scores, 690 Credit-scoring systems, Credit spreads, 228 Credit standards, 687, 697 Credit terms, 666 Creditworthiness, 225; fund capital and, , 392 Critical access hospitals, 86; Medicare reimbursement for, Cross-subsidization: premium categories and, 70; rate ratios and, 71 CRPs. See Call risk premiums Cumulative amount: surplus cash or loan requirement, 659 Cumulative issues: preferred stock, 319 Current accounts management: importance of, ; integrative application, Current liability accounts, ; accounts payable (trade credit), 673, ; accruals, Current Procedural Terminology (CPT) codes, Current ratio, , 578, 639; definition of, 266 Current stock price: estimating, DCF model and, 383 Current yield: on bond, 242 Curvilinear regression, 634, , 638, 642 CV. See Coefficient of variation Dashboards, 599, 600 Data analytics, 28 Data collection: P4P systems and, 103 Days-cash-on-hand ratio, Days in patient accounts receivable, , 666 Days in receivables, 583 Days sales outstanding, 583 DCF. See Discounted cash flow Debt, 251; after-tax cost, ; before-tax estimate, 373; cost estimation of, , 410; definition

9 Index 793 of, 215; long-term, 217, 232, 464, 629; riskless, 427; short-term, 217, , 232, 234, , 464; tax-exempt, 372, 710; yield to maturity on, Debt/assets ratio, 639 Debt capacity, , 552; effect of capital leases on, 341 Debt contracts, ; call provisions and, ; restrictive covenants and, ; sinking funds and, 268; trustees and, 267 Debt cost: for small business, 400 Debt-cost-plus-premium method: cost-of-equity estimate for small businesses, , 405 Debt-cost-plus-risk-premium method: comparative analysis of, 388; costof-equity estimate and, , 392, 412 Debt financing, 19, , 291, 442; advantages and disadvantages of, , 252; call risk premium in, ; capital structure decisions of taxable firms and, 445; comparison with lease financing, 343; credit ratings and, ; default risk premium in, ; inflation premiums in, 228; integrative application, ; liquidity premium in, ; of long-term debt, 217; Modigliani Miller models of, ; price risk premium in, 230; profitability and, 451; risk and return effects in, ; of short-term debt, 217, ; tax benefits of, 221, 452 Debt management (capital structure) ratios, Debt maturity structure, 461 Debt maturity structure decisions: aggressive policy for, 462, , 465; conclusions related to, ; conservative policy for, 462, 464, 465; maturity matching, 462, 463, 465; yield curve information and, 233 Debt ratio, , 690 Debt refunding, Debt securities: interest rates on, 231 Debt service requirements, , 239 Debt-to-equity ratio, Debt valuation, ; basic bond valuation model, ; definitions related to, Decision science: financial management as, 3, 29 Decision tree analysis, 545, 547, , 556 Deductibles, 55 56; credit card payments for, 689 Default: on corporate and municipal bonds, 224; on mortgage bonds, 229; technical, Default risk, 226 Default risk premiums, , 252 Deferred annuities, 143 Deferred call, 267 Deficiencies, 664 Demand (volume) variability, in business risk, 424 Demographic approach, 80; to health insurance premium rate setting, 69 Denials management, 664 Depreciable basis, 23 Depreciation, 13, 21 25, 30; effect on cash flow, 21 23; forecasting, 637; funded, , 686, 697; of leased assets, 338, 343, 344; leveraged leases and, 355; MACRS, calculation of, 22 23; MACRS illustration, 24 25; straight-line, 485; for tax purposes, calculating, Derivative contracts, 269 Diagnosis codes, 84 Diagnosis-related groups, 87 Diagnostic imaging devices: provider leasing and, 333 Differential efficiency, of mergers, 703 Differential risk-adjusted NPV, 537 Direct costs of bankruptcy, 437 Direct graduate medical education,

10 794 Index Direct placement, 284 Direct purchase plans, 286, 312 Disbursement control, , 677 Disbursement float, 653, 654 Disclosure: going public and, Discounted cash flow, 492, 718, 732; analysis, 127; comparative analysis of, 388; for cost-of-equity estimate, , 388, 392, 405, 412; estimating expected market risk premiums and, 378; example of, ; in valuation of business, , 717; valuation of projects with real options and, 550 Discounted cash flow approach, 727 Discounted charges, 86 Discounted earnings stream, 295 Discounted payback, Discounting, 127, 163; graphic view of, 137; lump-sum, ; 100- year bonds, ; of Treasury bills, 171 Discount rate, 718 Discount(s), 697; bonds selling at, 243, 252; for bulk purchases, 688 Discounts lost, 675 Discretionary replacement: project classification, Disinterested shareholders, 736 Disproportionate share hospital (DSH) payments, 111 Diversifiable risk, 206; portfolio risk versus, Diversification: through mergers, Divestitures: business valuation and, 710; forced, holding companies and, 44 Dividend income: of investor-owned corporations, 18 19; of not-forprofit corporations, 19; taxation of, 14, Dividend policy, 642; effect on external financing requirement and, 632 Dividend reinvestment plans, 285, 312 Dividends, 39, 216, 252, 375; from common stock, 280, 295; estimation of, 383, 385; expected, as basis for stock values, 296, ; paid by investor-owned corporations, 19 20; from preferred stocks, 319, 322; social, 506 Dividends per share, 383 Dividend valuation models, 312, 405; constant growth model, ; nonconstant growth model, Divisional cost, of capital, , 406 Dollar cost analysis, , 350, 361 Dollar return, on investments, , 163 DPS. See Dividends per share DRGs. See Diagnosis-related groups DRIPs. See Dividend reinvestment plans DRPs. See Default risk premiums Due diligence: defense, 723; definition of, 723 Due diligence analysis, 727; integrative application, ; in mergers, 713; mergers and primary purposes of, Du Pont analysis, , 600, EAR. See Effective annual rate Earnings before interest, taxes, depreciation, and amortization, 716, 717, 727, 732 Earnings before interest and taxes, 419, 420, 432, 580, 712; expectationally constant, 427 Earnings before taxes, 712 Earnings per share, 383; growth in dividends and, 300 EBIT. See Earnings before interest and taxes EBITDA. See Earnings before interest, taxes, depreciation, and amortization EBT. See Earnings before taxes

11 Index 795 Economic ordering quantity (EOQ) model, 636, 637, ; carrying costs and, ; illustration of, ; ordering costs and, 691, ; stockout costs and, 691; total inventory costs and, Economic value, of businesses, 704 Economic value added, 10, 565, , 600; compensating notfor-profit healthcare executives and, 596 Economies of scale, 633, 642; cash management and, 656 Effective annual rate, , , 163 Effective tax rate, 18 Efficiency indicators, 589, 592 Efficient markets hypothesis, 307, 313 Electronic check clearing, 654 Electronic claims processing, 654, 655 Embedded costs. See Historical (or embedded) costs EMH. See Efficient markets hypothesis Employees, full-time equivalent (FTE): compensation for, 67 Employee stock ownership plans, Endowment funds, 686 Environmental projects, 471 EOQ model. See Economic ordering quantity (EOQ) model EPS. See Earnings per share Equilibrium: of securities markets, Equipment: discretionary replacement of, ; leasing of. See Lease financing; mandatory replacement of, 470; salvage values and, Equity. See also Return on equity: common stock financing and dilution of, 292; in not-for-profit corporations, Equity capital, 19, 215, 251, 279, 292, 405, 568; of for-profit organizations, 374; insufficient, 375, 447; measuring cost of, ; of not-for-profit organizations, 374, Equity cost estimation: analysts forecasts, 386; Capital Asset Pricing Model (CAPM) of, , 392, 404 5, 412; comparison of methods for, 388; debt-cost-plusrisk-premium approach, , 392, 405, 412; discounted cash flow approach in, , , 392, 405, 412; financial distress effects in, 438; Hamada s equation for, 401, 412, 413, 414, 415; for large investor-owned businesses, ; for not-for-profit organizations, ; retention growth model and, 385; for small businesses, Equity financing, ; advantages/disadvantages of common stock financing, ; common stock valuation, ; contribution capital and, 632; decision to go public, ; informational efficiency, ; integrative application, ; market for common stock, ; with new common stocks, ; of notfor-profit organizations, ; rights and privileges of common stockholders, ; risk/return trade-off and, 311; security market equilibrium, 306 7; sources of, 292 Equity multiplier, 587 Equity ratio, 579 Equity residual method, 714 Equivalent annual annuity (EAA) method, 501 2, 513 Escape clauses, 327 ESOP. See Employee stock ownership plans Essential health benefits, Estate tax assessments: business valuation and, 710

12 796 Index Euromarket securities, 662 EVA. See Economic value added Evaluation and planning: financial management function and, 6 Exercise price, 10 Expected capital gains yield: constant growth model and, 301, 302 Expected constant growth rate in dividends: constant growth model and, 300 Expected dividend yield: constant growth model and, 301, 302 Expected growth rate: estimating, DCF model and, 383 Expected rate of return, , 201, 202, 211; on constant growth stock, , 312; on portfolios, ; on preferred stock, 322 Expected value, 205 Experience ratings, 54 Exposure units, 52 External financing plans, External financing requirement, 628, 641, 648; ability to attract contribution capital and, 632; capacity utilization and, ; capital intensity and, 632; dividend policy and, 632; profitability and, 632; projected revenue growth rate and, Face (par) value, 171, 238, 252 Factors, Fair market value, 717 Fair value: establishing, 740 Farm loans, 261 FASB. See Financial Accounting Standards Board FC. See Fixed costs Federal government: budgeting policy of, Federal hospital mortgage insurance, 269 Federal Housing Administration, 269 Federal income tax. See also Taxation: on capital gains, 16; consolidated returns for, 20; corporate, 16 20; health savings accounts based deductibles from, 72; individual (personal), 14 16; on interest income, 14; marginal, 14; on ordinary income, 14; on unrelated business income, 18; on wages and salaries, 14 Federal Reserve Board (the Fed), 227, 233, 260, 377; interest rate levels and, 275, 277; margin requirements, 324 Federal Reserve Bulletin, 232 Federal Trade Commission, 737, 738, 740, 743 Fedwire, 655 Fee-for-service methods, 65, 80, 113; charge-based reimbursement, 85, 86; cost-based reimbursement, 85 86; prospective payment, 85, Fee-for-service reimbursement, 83 85; financial incentives under, 89 91; risks under, FHA. See Federal Housing Administration Finance charges, 676 Financial Accounting Standards Board: Statement 13, lease accounting guidelines, 341, 361 Financial analysis. See also Financial condition analysis: role in capital budgeting, Financial assets, 127 Financial condition analysis, ; Du Pont analysis, ; integrative application, 604 5; key performance indicators and dashboards, ; operating indicator analysis, 565, 599; percentage change analysis, ; purpose of, 565; ratio analysis in, Financial controls, 640, 642 Financial counseling: pre-service, 663 Financial crisis of 2008: downgrading of bond insurers and, 269 Financial distress costs, , 445, 453; direct, 437; indirect, 438;

13 Index 797 management conservatism toward, ; trade-off models, Financial economies, of mergers, 703 Financial forecasting, ; comparison of methods in, 638; computerized methods of, ; with curvilinear regression, ; financial planning component of, ; integrative application, ; with multiple regression, 637; operational planning and, ; pro formas and, 623; realworld, ; revenue forecasts and, ; with simple linear regression, ; specific-item method, ; strategic planning framework in, Financial goals: identifying, 12 Financial incentives: capitation reimbursement and, 91; comparison of, to providers, 91 92; fee-for-service reimbursement and, Financial Industry Regulatory Authority, 325 Financial leases, , 361 Financial leverage, 425, 432, 578. See also Debt financing Financial management: activities within, 6 7; as decision science, 3, 29; primary role of, 6, 29; role of, in health services industry, 6 8, 29 Financial measures, 102 Financial mergers, 711 Financial planning: steps in, Financial plans, 619, 641 Financial reporting, Financial risk, 169, 453. See also Project risk analysis; context of, 169; definition of, 171, 425; expected and real rates of return concept of, ; integrative application, ; of large investor-owned businesses, 199; many faces of, ; measurement of, ; of not-for-profit businesses, 200; overview of, ; of reimbursement systems, 93 95; relationship to return on investments, 201 4; of small investor-owned businesses, Financial risk management: financial management function and, 7 Financial statement analysis, 565, 572, 599; common size analysis, 607 8, 611; dashboards in, 599; data overload and timeliness problems in, ; key performance indicators (KPIs) in, 599; limitations with, , 600; percentage change analysis and, , 611 Financial statement(s), 656; forecasted, 623; notes to, 572; pro forma, 623, 629, 641; types of, 566 Financing decisions: financial management function and, 6 Financing feedback effects, 629, 630, 641 FINRA. See Financial Industry Regulatory Authority Firing: managers, threat of, 10 Fitch Ratings (Fitch), (c)(3) or (4) corporations, 40 Five-year plans, 616, 617 Fixed assets, 6 Fixed-asset-turnover ratio, 582, 590 Fixed costs: financial incentives to providers and, 91 Fixed interest rate: on bonds, 219 Fixed payment leases: per procedure leases versus, Flexibility options, 549 Float, 287; accelerated collections and, ; collections, 653; disbursement, 653, 654; fund-outflow control and, 655; managing, , 677; net, 653 Floating-rate bonds, Floating-rate preferred stock, 662 Flotation (issuance) costs, 223, 372, , 451; amortization, ; refunding decision process and,

14 798 Index Food and Drug Administration, 336 Forecasted financial statements: creating, 623 Forecasting, real-world, Foundations: merger-related, 709 Founder diversification: going public and, 288 Founders shares, 318 Four-tier premium rates, 70 Fractional ownership: holding companies and, Free cash flow: definition of, 305 Free cash flow method: stock valuation by, 305 Free cash flow to equityholders method, , 727 Free operating cash flow method, , 727 Free trade credit, 676, 678 Friendly mergers (or friendly tender offer), 707, 713, 727, 740, 742 FTC. See Federal Trade Commission Full-time equivalent (FTE) employees: compensation for, 67 Functions, spreadsheet programs, 132 Fund capital. See Equity capital Funded depreciation, , 686, 697 Future value (Fv): of annuity, ; of annuity due, ; determination of, ; of lump sums, 129, ; relationship to interest rates, 134; of uneven cash flow streams, GAAP. See Generally accepted accounting principles Gambler s fallacy, Generally accepted accounting principles, 341, 566, 712, 717 General partners, 36 General valuation model, General valuation process: time line for, 237 Geographic diversification: capitalization rates and, 718 Globalization: merger wave and, Global pricing. See Bundled (global) pricing Goals: of not-for-profit corporations, Going private, 290 Going public, 287, ; advantages of, ; conclusions on, ; disadvantages of, Going rate, 239 Golden parachutes, 736 Goodwill, 726, 727 Government grants: as equity capital source, , 312, 447 Government loans, 261 Gross fixed assets: forecasting, 637 Group health insurance policies, Growth rate: capital structure decision and, 451; estimation of, , 405; fund capital and, 390; sustainable, 631 Guideline (tax-oriented) leases, , 361 Hamada s equation, 401, 412, 413, 414, 415 HCPCS. See Healthcare Common Procedure Coding System HDHPs. See High-deductible health plans Health Care and Education Reconciliation Act, 55 Healthcare Common Procedure Coding System, 97 Health information technology: population health management and, 28 Health insurance: adverse selection for, 52 55; basic characteristics of, 51 52; basic concepts of, 50 51; health reform and, 76 79; history of, 57; moral hazard concept, 55 56; preexisting conditions clauses of, 54; underwriting provisions of, 53; uninsured population and, 55

15 Index 799 Health insurance exchanges, 26, Health Insurance Portability and Accountability Act, Health insurance premiums: allocating premium dollars, 63 65; copayment effects on, 56; development of rates for, 65 66, 70 71; employer-paid, 63 64; other physician-related costs rate, 68; primary care rate, 67; specialty care rate, 67 68; tier basis for, 70; total physician rate, Health maintenance organizations: allocation of insurance premiums by, 63 65; charge-based reimbursement by, 86 Health reform: financial management and, 25 29; health insurance and, 76 79; payments to providers and, Health reimbursement arrangements, 72, 73, 78 Health savings accounts, 72, 73, 75, 78 Health services industry: role of financial management in, 6 8 Hedge funds, 687 Hedging, 188 HIEs. See Health insurance exchanges High-deductible health plans, 72, Hill-Burton Act, 293 HIPAA. See Health Insurance Portability and Accountability Act Historical betas, 379 Historical growth rates: to forecast future growth, Historical (or embedded) costs, 371 Historical returns, 377, 378 HMOs. See Health maintenance organizations Holding companies, 17, 42 44; advantages with, 42 43; disadvantages with, 43 44; tax-exempt, 43 Home health care services: Medicare reimbursement for, 99 Home health resource groups, 99 Home loans, 261 Homogeneous expectations, 427 Homogeneous risk class, 427 Horizontal integration, 45 Horizontal mergers, 706, 727 Hospice services: Medicare reimbursement for, 100 Hospital-acquired conditions: Medicare penalties for, 112 Hospital inpatient rate, Hospitals: bond-issuing authority and debt financing costs for, 372; financial challenges facing, 8; HMO payments to, 64; longterm securities management and, ; not-for-profit, 41, 293, 709; receivables financing for, 265; top issues confronting, 8 Hospital service plans, 57 Hospital trade associations, Hostile mergers, 708, 727 Hostile takeovers, 11, 282, 290, 708, 723, 736, 742; friendly takeovers versus, HRAs. See Health reimbursement arrangements HSAs. See Health savings accounts Hurdle rates, 395, 396, 399, 405 Hybrid businesses, Illiquid assets, 230 Improvement performance, 102, 114 Inactive markets: going public and, 290 Incentive compensation plans, 10 Incentives: managerial, 10 Income statements, 419, 566, , 639; constant growth method/ model and, 625; financial forecasting and, 645, 646; inflation effects and, 594 Incremental cash flows, 474, 511 Indemnification, 52, 79 Indentures, 266 Index rate, 218

16 800 Index Indigent care: tax-exempt status and, 41 Indigent care loss, 95 Individual (personal) income taxes, Industry average ratios, 573 Industry averages: capital structure decision and, 450 Inflation, 512, 636; balance sheets and income statements and, 594; as project analysis component, 478; relationship to interest rates, 217, 227; Tax Code and, 13 Inflation premiums, 228, 231, 233, 252, 479 Inflation rate: earnings per share and, 300; money supply and, 275 Inflow terminal value, 497 Informational efficiency, Information asymmetry theory, 451 Information costs: lower, lease financing and, 359 Information technology: cost-effective supply chain management and, 671; pay-for-performance systems and, 103 Initial denial rate, 668 Initial public offering, 287 Innovation, market for, 311 Inpatient full-time equivalents (FTEs) per occupied bed, 592 Inpatient prospective payment system, 95, 96, 113 Inpatient rehabilitation facility prospective payment system, Inpatient services risk pool, Input cost variability, in business risk, 424 Insider information: efficient markets hypothesis and, Insurance verification: pre-service, 663; time-of-service, 663 Intangible assets: trade-off models and, 440 Integrated delivery systems, 7, Intensity-of-service indicators, 589 Interest: tax deductibility of, 420; on term loans, 217 Interest income: of not-for-profit corporations, 19; paid by investorowned corporations, 19 20; received by investor-owned corporations, 18 19; taxation of, Interest rate: on alternative lender financing, 263; bond refunding forecast and, 274; on bonds, 221, 222, 222, 243, 244; cash management and, 656; corporatecapital-cost estimation and, 403; cost-of-capital estimate and, 403, 406; cost of debt and, 374; costof-debt calculations, 373, 374; on debt securities, 231; definition of, 216; effective annual rate (EAR), , , 163; effect on value of perpetuities, 149; on floating-rate bonds, 220; as function of supply and demand for funds, ; on mutual funds, 662; periodic, 161, 163; relationship to future value, 134; relationship to perceived risk, 217; Rule of 72 and, ; solving for, ; stated (nominal), , 163; on term loans, 218; term structure of, , 252 Interest rate components, ; call risk premium, ; combining, 231; default risk premium, ; inflation premium, 228; liquidity premium, ; price risk premium, 230; real risk-free rate, Interest rate levels: economic factors with influence on, ; supply and demand and, Interest rate risk: minimizing, ; price risk, 249, 251, 253; reinvestment rate risk, 249, 251, 253 Internal rate of return, 155, 163, 512, 520; comparison with net present value, 495; corporate merger

17 Index 801 opportunities evaluated with, 510; in lease financing, 349, 352, 355; modified, ; profitability of project and, ; salvage values and, 517; sensitivity analysis and, 525 Internal Revenue Service (IRS), 17, 487; lease agreement regulations of, 336, 337, 342, 344, 361; leveraged leases guidelines of, 355; private-letter rulings from, 710; Schedule H of revised Form 990, 41; substantial equity position according to, 722; tax book value and, 25; Tax Code 501(c)(3) or (4), 40 International Classification of Diseases (ICD) codes, 84, 85 Inventory: economic ordering quantity (EOQ) model and levels of, Inventory blanket liens, 265 Inventory control methods, Inventory control systems, computerized, 671 Inventory costs: types of, 697 Inventory management, 671 Inverted (abnormal) yield curve, 233 Investment bankers: involvement in mergers, , 743; role of, 331; selection of, 326 Investment banking: selling procedures in, ; websites for, 331 Investment banking process, ; selling procedures, ; shelf registrations, ; Stage I decisions, ; Stage II decisions, Investment cash flows: opportunity cost rate applied to, 139 Investment decisions: financial management function and, 6 Investment horizon, 170, Investment income: personal taxes on, 14 Investment opportunities, 216 Investments: alternative, 687; financial risk and, ; long-term, 686 Investor-owned businesses, 4, 38 40; capital structure decisions for, ; control of, 450; differentiated from not-for-profit organizations, 40, 41; dividends paid by, 39; EVA and value of, 596; interest and dividend income received by, 18 19; interest and dividends paid by, See Corporations; leaserelated tax deductions for, ; market risk, corporate risk, and, 523; organizational goals of, 9 11; tax laws and, 511 Investors: marginal, 306; stand-alone risk and, 189 IPO. See Initial public offering IPPS. See Inpatient prospective payment system IPs. See Inflation premiums IRR. See Internal rate of return IRS. See Internal Revenue Service ISRP. See Inpatient services risk pool Issuance (flotation) costs, 223, 284, 292, 372, , 451; amortization, ; refunding decision process, Joint ventures, 7, , 727 Junk bonds, 229, 741 Junk debt, 225 Just-in-time (JIT) systems, , 678 Key performance indicators, 599, 600 Knockout bid, 721 KPIs. See Key performance indicators LASIK: per use leases and, Law of large numbers, 51, 79 Lead (or managing) underwriter, 329 Lean technique, 562 Lease financing, 45, ; bankruptcy and, lower risk in, 359; cancellation clauses in, 334;

18 802 Index comparison with debt financing, 343; for credit availability, ; integrative application, ; lease analysis symmetry in, 353; lease evaluation by lessee in, , 361; lease evaluation by lessor in, , 361; lease parties and types in, ; lessee, 333; leveraged leases in, ; liquidity preservation and, 360; lower information costs and, 359; maintenance services, 359; motivations for, , 361; obsolescence (residual value) risk and, 357; as off-balance-sheet financing, ; overview, 333; per procedure versus fixed payment leases, ; project life risk and, 358; sale and leaseback, 335; setting lease payments in, 354; tax differentials in, ; tax effects on, ; utilization risk and, 358 Leases: capitalized, ; combination, 335; financial, ; operating, 334; tax-exempt, 339 Lender attitudes: capital structure decision and, 449 Length of stay: under prospective payment reimbursement, 93 Length-of-stay indicators, 589 Lessee: definition of, 333; lease evaluation by, , 361 Lessor, 333; definition of, 333; lease evaluation by, ; setting of lease agreement by, 354 Leverage: definition of, 354 Leveraged leases, Levered firm: with corporate and personal taxes, value of, 434; with financial distress, value of, 439 Liability, 568; exposure uncertainty versus, 424; limited, 35, 36; unlimited, 34 Limited liability: corporations and, 35, 36 Limited liability company, 37 Limited liability partnership, 37 Limited partners, 36 Line of credit, 262, 263, 276 Liquid assets: definition of, 229 Liquidation proceeds, 39 Liquidation value, 717 Liquidity, 36, 266, 576; capitalization rates and, ; going public and increase in, 288; lease-based preservation of, 360; payback and, 491 Liquidity planning: cash budget and, 660 Liquidity premiums, , 252, 402, 406 Liquidity ratios, , 600 LLC. See Limited liability company LLP. See Limited liability partnership Loan agreements, 266 Loans: amortized, , 163; term, Lockboxes, 654, 677 Log-linear least squares regression: of estimated growth rate estimation, 384 Long-run viability: capital structure decision and, 448 Long-term capital gains: taxation of, 16 Long-term debt, 217, 232; short-term debt versus, 223 Long-term investments, 686 Long-term securities management, LOS. See Length of stay Losses: pooling of, 52 LPs. See Liquidity premiums Lump sum, 128; future value of (compounding), ; present value (discounting) of, ; Rule of 72 and, Lumpy assets, 634, 642 MACRS. See Modified Accelerated Cost Recovery System Maintenance margin, 324

19 Index 803 Maintenance services, lease agreements for, 359 Managed care plans, 737. See also Health maintenance organizations; collection policy and, 670; finance function and, 7; Medicare Advantage as, 62 Managerial conservatism: capital structure decision and, Managerial incentives: creation of, 10 Managers: firing of, 10 11; incentive compensation plans for, 10; investor-owned corporations, 10, 11; of not-for-profit firms, 11, 12; of privately held firms, 39 Mandatory replacement: project classification, 470 Marginal costs, 371, 393 Marginal investors, 306 Marginal tax rate, 14 Margin call, 324 Margin requirements, 324 Marketability: capitalization rates and, Marketable securities, 661, 677, 703; holding, rationale for, 661; selecting, criteria for, 662 Market beta, 194, 195, 196, 200, 201, 206, 299, 300, 376, 413, 521, 555, 716; adjusted, 379, 380, 405; Capital Asset Pricing Model and, 205; CAPM cost-of-equity estimate and, ; fundamental, 380, 405; historical, 379, 380, 405; of stocks, 197 Market/book (M/B) ratio, 607 Market characteristic line, , 197 Market conditions, response to changes in, 424 Market multiple analysis, 716, 717, 718, 727, 732, 733 Market portfolio, 187, 194, 375 Market power: increased, mergers and, 703 Market risk, , 206, 555; definition of, 194, 521; market beta measure of, ; relationship among stand-alone risk, corporate risk, and, , 539; relevance of, 198, 200 Market risk premium, 202, 203; CAPM cost-of-equity estimate, Market value ratios, 606 7, 611 Master account, 655 Matching principle, 21 Materials management, 671 Maturity date: definition of, 238 Maturity(ies): of corporate bonds, 219; debt categorized by, 217; of term loans, 218; Treasury bonds and years to, 233 MDA. See Multiple discriminant analysis Medicaid, 62 63, 77, 80; expanded eligibility for, 26, 62, 78; pay-forperformance program of, 105 7, 108 Medicare, 7, 77, 80, 507; accountable care organizations and, 27; case-mix index of, 591; expanded eligibility requirements for, 26; graduate medical education funding by, ; overview, 61; Part A, 61, 62; Part B, 61, 62; Part C (Medicare Advantage), 61 62; Part D, 61, 62; quality-based compensation and, 111; reimbursement methods used by, 86, Medicare Administrative Contractor (MAC) jurisdictions, 62 Medicare Advantage plans, 62 Medicare Modernization Act of 2003, 72 Medicare Payment Advisory Commission (MedPAC), 62 Medicare severity diagnosis-related groups, 95 96, 113 Medigap insurance, 61 Members: of limited liability company, 37 Merger analysis, 727