Leasing Equipment

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  • Suggest one (1) key economic factor that motivates leasing as an option in acquiring an asset. Explain the potential asymmetries that may exist where leasing may be beneficial to both the lessors and the lessee.
  • Determine one (1) significant benefit to an organization that decides to lease an asset that conventional lease analysis evaluation reveals has a negative Net Advantage to Leasing (NAL). Provide a real-life scenario that supports your answer.
  • These are the scenarios that go with the discussion
    HSA525 Week 9 Script: Understanding Investment Terms
    Slide #Scene/InteractionNarration
    Slide 1Scene 1:

    Professor Quan uses projector

    HSA525_9_1_1_ProfQuan-1:  Greetings….welcome to our lecture on Investment Terms. During this lecture, we will explore investment terminology and related meanings for cash equivalents, long-term investments in bonds, investments in stocks, and company ownership in the context of investing. The healthcare industry is rapidly evolving and without critical capital investment, many healthcare organizations will find significant challenges with respect to fully executing the organization’s strategic objectives. Consequently, the need for effective, sound investment decisions are more critical than ever.

     

    HSA525_9_1_1_Sophia-1:   From an accounting standpoint….how are investments recorded?

     

    HSA525_9_1_1_ProfQuan-2:  Investments should be recorded as either current assets or long-term assets on the balance sheet. Just to reiterate….current assets are cash, cash equivalents, and short term securities. In other words, current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash. Current assets are very important to the organization because they are the assets that are used to support the daily operations and they also fund ongoing expenses. If there is a deficiency in current assets, the organization will have to consider other sources of short-term funding, either by taking on debt or issuing additional stock. Neither would be ideal as additional debt will result in interest payments and issuing additional stock will result in a dilution of shareholder value.

     

    HSA525_9_1_1_Tyler-1:   I can certainly appreciate what you have stated in terms of neither being a good alternative. Can you explain marketable securities?

     

    HSA525_9_1_1_ProfQuan-3:  Absolutely….. Marketable securities are liquid securities that can quickly be converted to cash and at a reasonable price. Marketable securities have durations of less than one year, have high trading volumes and sustain very little price fluctuations.

     

    HSA525_9_1_1_Sophia-2:   Professor, can you provide examples of what would be considered marketable securities?

     

    HSA525_9_1_1_ProfQuan-4:  Yes, marketable securities include stocks, bonds, short-term commercial paper and certificates of deposit. They are cash equivalents often referred to as near cash.

     

    HSA525_9_1_1_Lauren-1:   What are some reasons a healthcare organization may hold cash and marketable securities?

     

    HSA525_9_1_1_ProfQuan-5:  Healthcare organizations hold marketable securities for three reasons: First, to earn a higher rate of return than cash can earn.  Second, they are very liquid and can be converted cheaply into cash, and third, they are passive investments that consume little amounts of management’s attention.  Marketable securities play a role in deciding what securities to buy and sell. Marketable securities provide investors with the liquidity of cash and the ability to earn a return when the assets are not being used.

    Slide 2Check Your Understanding:

    Investments are recorded as:

    A. Liabilities on the balance sheet

    B. Current Assets on the balance sheet

    C. They are not recorded on financial statements

    •        Incorrect…They are recorded as current assets on the balance sheet.

    •        Correct….Investments are recorded as current assets on the balance sheet.

    •        Incorrect…They are recorded on the balance sheet as current assets.

     
    Slide 3Scene 2:

    Professor Quan uses projector

    HSA525_9_1_2_ProfQuan-1:  There are basically two methods of long-term financing: debt financing and equity financing.   In debt financing, interest payments made to bondholders arean expense that reduces taxable income. In equity financing, on the other hand, dividend payments are made from after tax net income and retained earnings. A bond is a long-term debt instrument under which a borrower agrees to make payment of interest and principal on particular dates to the holder of the bond. Because they are long term contracts….bonds typically mature in twenty to thirty years…generally speaking. As part of a portfolio, bonds provide both stability and income to the healthcare organization.

     

    HSA525_9_1_2_ProfQuan-2:  There are four main types of bonds namely: treasury, corporate, municipal, and foreign.  Each type differs with respect to expected return and degree of risk.

     

    HSA525_9_1_2_Tyler-1:  Can you explain each type?

     

    HSA525_9_1_2_ProfQuan-3:  Yes….Treasury bonds are issued by the Federal government and are not exposed to default risk. Treasury bonds are sometimes called government bonds. They pay a fixed rate of interest every six months until maturity.

    Corporate bonds are issued by corporations and are exposed to default risk.  Different corporate bonds have different levels of default risk, depending on the issuing company’s characteristics and on the terms of the specific bond. Also, corporate bonds offer a higher yield compared to some other investments, but for a price. Most corporate bonds are debentures, meaning they are not secured by collateral.

     

    HSA525_9_1_2_ProfQuan-4:  Municipal bonds are issued by state and local governments.  The interest earned on most municipal bonds is exempt from federal taxes and state taxes if the holder is a resident of the issuing state. They are available in two kinds: general obligation bonds and revenue bonds.

     

    HSA525_9_1_2_ProfQuan-5:  Finally, Foreign bonds are issued by foreign governments or foreign corporations.  These bonds are not only exposed to default risk, but are also exposed to an additional risk if the bonds are denominated in a currency other than that of the investor’s home currency. Foreign bonds are regulated by the domestic market authorities and are usually given nicknames that refer to the domestic market in which they are being offered.

     

    HSA525_9_1_2_Lauren-1:   What determines bond prices?
    HSA525_9_1_2_ProfQuan-6:  Bond prices are determined by several factors…including the current market interest rates. Bond prices will generally increase when interest rates drop and decrease when interest rates rise. In addition, bond prices are sensitive to inflation…high inflation will tend to devalue bonds. Another common factor is political uncertainty.  Organizations may not invest when the government seems unstable. Yes, even political elections affect bond prices. Finally, liquidity affects prices of bonds… the ease and cost of trading a particular bond will affect the price.

     

    HSA525_9_1_2_Sophia-1:   Can you explain how political elections may affect bond prices?

     

    HSA525_9_1_2_ProfQuan-7:  Investors react favorably to policies that are seen as being fiscally favorable. The prospect of lower spending, and in some cases higher taxes, can be very favorable for the bond market. Therefore, the perception of the political party’s financial policies plays a key role in how the bond market reacts to elections.

     

    Slide 4Scene 3:

    Professor Quan uses chalkboard.

    HSA525_9_1_3_ProfQuan-1:  Municipal bonds are typically used to finance capital projects. Municipal bonds include general obligation and revenue bonds. To re-emphasize, general obligation bonds are issued under the pretext that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral. Revenue bonds are backed or secured by revenues of their particular project. Mortgage bonds are another form of municipal bonds.  The mortgage bond is backed by certain real estate properties.

     

    HSA525_9_1_3_Lauren-1:   Would you say that a revenue bond carries significant risk?

     

    HSA525_9_1_3_ProfQuan-2:  Yes, for instance, a hospital revenue bond used to construct a hospital is considered risky because the bond is secured by the revenue the hospital receives from its operations. Remember, hospitals tend to carry a significant amount of bad debt as a result of uninsured or underinsured patients. Other factors that challenge hospitals include shrinking reimbursement and changes to pay structure from payers such as Medicare.

     

    HSA525_9_1_3_Tyler-1:   Would you say that a mortgage bond is less risky than revenue bonds?

     

    HSA525_9_1_3_ProfQuan-3:  Yes….I would agree…mortgage bonds are secured with real property, making the bond less risky than the revenue bond.

     

    HSA525_9_1_3_Sophia-1:   Professor, you have described the revenue bond as risky….how might it compare to debentures?

     

    HSA525_9_1_3_ProfQuan-4:  Well, remember that a debenture is an unsecured bond.  Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. Debentures are secured only by the general creditworthiness and reputation of the bond issuer.

     

    HSA525_9_1_3_Sophia-2:   Is the debenture often used to secure capital?

    HSA525_9_1_3_ProfQuan-5:   As a matter of fact, they are….consider the government issued T-Bills…these are considered pretty safe as the government has options to pay the debts…such as raising taxes.

     

    Slide 5Scene 4:

    Professor Quan uses projector.

    HSA525_9_1_4_ProfQuan-1:  Stocks are a type of security that signifies ownership in an organization and represents a claim on part of the organization’s assets and earnings. Stocks differ from bonds as stocks represent equity, or net worth in a company. Generally, a bondholder is a creditor, because bonds are liabilities to the issuing company. Two types of stocks are common and preferred stock. Common stockholders have voting rights at stockholder meetings. Common stockholders are also entitled to stockholder dividends. Preferred stockholders generally have no voting rights; but, retain higher claims to assets and earnings.

     

    HSA525_9_1_4_Lauren-1:   You stated that the preferred stockholder has the advantage of higher claims to assets and earnings. Does this advantage hold true if the organization becomes bankrupt and has to liquidate?

     

    HSA525_9_1_4_ProfQuan-2:  Preferred stockholders automatically receive a fixed dividend with their stock ownership. If a business goes bankrupt and has to liquidate its assets, it will pay off its creditors, bondholders, preferred shareholders … and only after all of stakeholders have received funds will common shareholders get their ownership stake.

     

    HSA525_9_1_4_Tyler-1:   The fixed dividend received by the preferred stockholder seems to be very beneficial as the preferred stockholder will have the knowledge of what to expect in terms of payout. Is this the case for the common stockholder as well?

     

    HSA525_9_1_4_ProfQuan-3:   Not necessarily….Before dividends are distributed…the board of directors will have to declare a dividend. The organization’s board of directors will determine when dividends are paid to common stockholders. The board of directors will also decide the method of payment…whether cash dividends or additional stock.

     

    HSA525_9_1_4_Sophia-1:   How are dividends reported on the income statement?

     

    HSA525_9_1_4_ProfQuan-4:  Dividends on common stock are not reported on the income statement because they are not considered expenses. However, dividends on preferred stock are deducted from net income in order to report the earnings available for common stock on the income statement.

     

    Slide 6Check Your Understanding:

    Characteristics of Preferred Stockholders are:

    A. They have the right to vote on corporate issues such as board elections and corporate policy.

    B. The dividends paid generally fluctuate.

    C. They have a greater claim to the company’s assets.

    •        Incorrect…common stockholder’s have voting rights; preferred stockholders do not

    •        Incorrect…the dividends paid to preferred stockholders are fixed

    •        Correct….Stockholders do have a greater claim to the company’s assets.

     

     

     

    Slide 7Scene 5:

    Summary

    HSA525_9_1_5_ProfQuan-1:  Today’s lecture included a discussion on key terms in investing. Healthcare organizations invest in order to remain competitively viable. Analyzing the political and economic climates is essential for the current healthcare organizations and should be a key consideration for all investment decisions. Major investments must be based on clearly defined strategies, due diligence and investment decisions approved in the context of corporate governance. Are there any questions?

     

    HSA525_9_1_5_Tyler-1:   Professor, how can healthcare organizations be assured that their investments have paid off?

     

    HSA525_9_1_5_ProfQuan-2:  First, investments must be based on a clearly formulated strategy and a predefined, required return on investment. Transparency is key. Data from previous investments must be available and reviewed in order to determine the success of current and future investment decisions. It is important to note that prior investment decisions should not be considered as the determining factor for current decisions, but may be used as a means of establishing reasonable expectations. Analysis of investment decisions should include a structured evaluation and discussion of investment performance on a periodic basis. Such analysis should include a quantification of whether returns are meeting targeted goals. A willingness to make modifications to investment policies is also important in ensuring that the organization’s investments pay off.

     

    Are there any other questions?

     

    HSA525_9_1_5_Lauren-1:  No questions….

    HSA525_9_1_5_Sophia-1:  …Not at this time…

     

    HSA525_9_1_5_ProfQuan-3:  Thanks for another great class…..this concludes our lecture…I will see you all next time…

  •  

    HSA525 Week 10 Lecture 1 Script: Business Loans and Financing Costs
    Slide #Scene/InteractionNarration
    Slide 1Scene 1

    Professor Quan uses chalkboard.

    HSA525_10_1_1_ProfQuan-1: Hello everyone….welcome to our lecture on business loans and financing costs. Business loans represent debts incurred to assist in running a business. Healthcare managers must consider whether to take on debt and how much debt should be taken on….these are two very common and necessary components of financial planning.

     

    HSA525_10_1_1_ProfQuan-2: Rising healthcare costs, lower reimbursement rates, and higher levels of charitable care and bad debt, are creating challenges with respect to the financing options for the healthcare organization. The healthcare organization’s traditional sources of capital include borrowing from lending institutions, borrowing from investors, retaining the excess of revenues over expenses and selling an additional interest in the organization. Healthcare organizations require significant financial resources in order to remain competitively viable. Investments in new facilities and technologies can place an enormous financial strain on today’s healthcare organizations.

     

    HSA525_10_1_1_Lauren-1:  Professor, would you say that the challenge of securing finance is similar for both the for-profit and the non-profit healthcare organization?

     

    HSA525_10_1_1_ProfQuan-3:  Yes….both the non-profit as well as the for-profit healthcare organization faces significant challenges in securing appropriate financing. Non-profit healthcare organizations generally access the tax-exempt debt market to generate new capital and refinance existing debt, while for-profit healthcare organizations pursue financing through public and private equity and debt financing transactions.

     

    HSA525_10_1_1_Sophia-1:  You mentioned the practice of borrowing from investors…..would this type of borrowing commonly include the selling of bonds?

     

    HSA525_10_1_1_ProfQuan-4: That is correct….bonds represent the company’s promise to pay at a future date. It’s similar to an I-O-U. A bond is a loan between the borrower or issuer, and the lender or investor.

     

    HSA525_10_1_1_Tyler-1:  Why would a healthcare organization choose to issue a bond as opposed to securing bank financing?

     

    HSA525_10_1_1_ProfQuan-5: Some organizations choose to issue bonds rather than borrow from banks because the bond process is perceived as less prohibitive, and is generally considered a cheaper option than the traditional bank loan.

     

    HSA525_10_1_1_Tyler-2:  Can you explain why issuing bonds are considered less prohibitive?

     

    HSA525_10_1_1_ProfQuan-6: Bank loans often are accompanied by bank covenants; rules….which tend to limit the borrower’s spending flexibility.

    Slide 2Scene 2:

    Professor Quan uses projector.

    HSA525_10_1_2_ProfQuan-1: Financing costs generally involves interest rates and loan costs. Interest rates represent the prices paid to borrow funds.  Simply put…an interest rate is the price of money. Loan costs may include the expenses necessary to close the loan, or closing costs.

    HSA525_10_1_2_Tyler-1:  How do interest rates affect bond prices?

     

    HSA525_10_1_2_ProfQuan-2: It is actually an inverse relationship…when interest rates rise, bond prices fall…when interest rates drop, bond prices tend to rise.

     

    HSA525_10_1_2_Sophia-1:  I understand that there is usually an interest on loans, but….I am not sure of bonds. Is there an interest on bonds?

     

    HSA525_10_1_2_ProfQuan-3:  Consider that bonds are generally what we call an interest-only loan. This simply means that the borrower pays the interest every period, but none of the principal is repaid until the end of the loan. As you can see, there is an interest associated with bonds. There are bonds that do not pay interest during the life of the security….these bonds are referred to as zero coupon bonds. The interest on a zero coupon bond is paid in one lump sum at maturity.

     

    HSA525_10_1_2_Tyler-2: What would be the advantage of a zero coupon?

     

    HSA525_10_1_2_ProfQuan-4: The advantage to the issuer is the delay of interest payments.

     

    HSA525_10_1_2_Lauren-1:  In your view, what types of bond would you say carries higher interest rate risks?

     

    HSA525_10_1_2_ProfQuan-5: The amount of interest risk that a bond has really depends on how sensitive its price is to interest rate changes. This sensitivity directly depends on two things: the time to maturity and the coupon rate. So, there are really two main factors to consider….the time to maturity and the coupon rate. Long term bonds are subjected to more volatility.

     

    HSA525_10_1_2_Sophia-2:  Can you explain what is meant by the coupon rate?

     

    HSA525_10_1_2_ProfQuan-6: Certainly…..the coupon rate is the interest rate on a bond at the time of issuance. You may also hear it referred to as the yield rate. This is the rate that the issuer promises to pay during the terms of the loan.

     

    Slide 3Scene 3:

    Professor Quan uses projector.

    HSA525_10_1_3_ProfQuan-1: The interest rate is the fee for using money, expressed in annual percentage terms. The interest rate is determined by the supply and demand for money. The demand for money is created by organizations seeking funds. The supply of money comes from those with a surplus of funds. The nominal interest rate is the interest rate reported at the time that the loan is made. This rate does not account for the effects of inflation. The real interest rate, on the other hand, is not usually reported when a loan is made. This rate takes into account the effects of inflation on the purchasing power of money repaid from a loan.

     

    HSA525_10_1_3_Lauren-1: What decisions can the healthcare manager make as a result of knowing the real interest rate?

     

    HSA525_10_1_3_ProfQuan-2: Knowing the real interest rate can give the manager a more realistic idea of the total value of the investment over time. Real interest rates can also shed light on the realistic cost of a loan over the repayment term. Real interest rates can help the healthcare manager to decide whether it is in the organization’s best interest to repay a loan early or to sell a bond rather than holding it to maturity.

     

    HSA525_10_1_3_Tyler-1:  Is there a specific relationship between the real interest rate and the nominal interest rate?

    HSA525_10_1_3_ProfQuan-3: Yes, the real interest rate is basically the nominal interest rate minus the inflation rate. Since the inflation rate over the course of a loan is not known initially, volatility in inflation represents a risk to both the lender and the borrower. Two other very important interest concepts are simple interest and compounding interest.

    The simple interest is interest paid on the original principal only…while compounding interest is the interest earned not only on the original principal, but also on all interests earned previously.

     

    HSA525_10_1_3_Sophia-1: So, essentially….compound interest is interest paid on interest.

     

    HSA525_10_1_3_ProfQuan-4: Exactly….. compound interest refers to the idea that when interest is earned on an investment, that interest is rolled back into the investment and starts to build on itself. For example…suppose the organization has fifty thousand dollars in an interest bearing account that earns five percent each year, compounded annually. At the end of the year, the organization earns twenty five hundred dollars and that is put back into the account. The next year, the organization is earning five percent on the new balance of fifty two thousand-five hundred dollars. Note that the earning has increased although no action was taken besides leaving the funds in place. That is considered the power of compound interest.

     

    Slide 4Check Your Understanding:

    The relationship between nominal and real interest rates is:

    A. The real interest rate is the nominal interest rate minus the inflation rate.

    B. The real interest rate is the nominal interest rate plus the inflation rate.

    C. There is no relationship between nominal and real interest rate.

    •        Correct! The relationship between the nominal and real interest rates is that the real interest rate i s the nominal interest rate mine the inflation rate.

    •        Incorrect….the real interest rate is the nominal interest rate less the inflation rate.

    •        Incorrect….the real interest rate is the nominal interest rate less the inflation rate

     

     

     

     

    Slide 5Scene 4:

    Summary

    HSA525_10_1_4_ProfQuan-1: During today’s lecture, we discussed financing and some of the financial tools used to secure funding for capital for the healthcare organization. Access to capital is critical to keep facilities current, add major information technology systems and strengthen quality initiatives. Healthcare organizations are experiencing unprecedented challenges in terms of raising the funds necessary to achieve its goals. We have concluded today’s lecture….are there any questions?

     

    HSA525_10_1_4_Tyler-1:  Yes, professor….can you explain amortization?

     

    HSA525_10_1_4_ProfQuan-2: Yes….amortization refers to the gradual process of paying off debt through a series of equal periodic payments. We often hear the terms amortization and depreciation used interchangeably; however, the concepts are different. Amortization refers specifically to intangible assets, while….depreciation refers to tangible assets.

     

    Are there any other questions?

     

    HSA525_10_1_4_Sophia-1: No questions….thanks

    HSA525_10_1_4_Lauren-1:  No questions……

     

    HSA525_10_1_4_ProfQuan-3: If there are no further questions, we will adjourn at this time. I look forward to our next lecture where we will discuss purchase versus leasing decisions…….

     

     

     

     

    HSA525 Week 10, Lecture 2 Script: Owning Versus Leasing Equipment

    Slide #Scene/InteractionNarration
    Slide 1Scene 1:

    Professor Quan uses projector.

    HSA525_10_2_1_ProfQuan-1: Hello Everyone…..welcome to today’s lecture. We will discuss the all-important financial decision of owning versus leasing. When comparing an asset lease versus an asset purchase, the financial manager must assess the needs of the organization and make prudent financial decisions. Healthcare organizations have significant needs for assets, but generally have limited resources available for which to acquire the necessary assets. As such, financial managers must consider the best way to allocate resources effectively and efficiently.

     

    HSA525_10_2_1_Sophia-1:  I think that the purchase  versus lease  decision is more complex today than ever before.

     

    HSA525_10_2_1_ProfQuan-2: I think that is an interesting perspective….can you provide insights into why you think the decision is more complex now?

     

    HSA525_10_2_1_Sophia-2: I believe that the advances we see in technology and the rate at which technology becomes obsolete has to be a primary concern for healthcare organizations.

     

    HSA525_10_2_1_ProfQuan-3: That is a great point…..keeping pace with the emerging technologies and the costs of acquiring new technologies does complicate the purchase versus leasing decisions quite significantly.

     

    HSA525_10_2_1_Tyler-1:  Wouldn’t those issues favor leasing over purchasing?

     

    HSA525_10_2_1_ProfQuan-4: Making the lease versus purchase decision requires consideration of many factors….including protection against obsolescence. While it is true that healthcare financial managers often view leasing as a hedge against obsolescence, it would be a mistake to consider leasing based solely on this notion. The financial manager must consider the financial risk as well as the productive life of an asset associated with that asset’s acquisition.

     

    HSA525_10_2_1_ProfQuan-5: An important factor to be considered is the type of lease…It could be a capital lease which is often referred to as a finance lease, or it could be an operating lease.

     

    HSA525_10_2_1_Lauren-1:  Professor, how does a capital lease differ from an operating lease?

     

    HSA525_10_2_1_ProfQuan-6: Capital leases and operating leases are each used for different purposes and are also treated differently on the organization’s financial statements. The primary difference between capital leases and operating leases is that capital leases transfer ownership of leased assets while operating leases only transfers the right of use as opposed to ownership.

    Slide 2Scene 2:

    Professor Quan uses the chalkboard.

    HSA525_10_2_2_ProfQuan-1: Let’s take a closer look at the capital lease. A lease is considered a capital lease if the life of the lease is seventy five percent or greater than the assets useful life; the lease contains a purchase agreement for less than market value; the lessee gains ownership at the end of the lease period; or if the present value of lease payments is greater than ninety percent of the asset’s market value.

     

    HSA525_10_2_2_ProfQuan-2: If the lease is classified as a capital lease, an asset and corresponding liability are recognized on the balance sheet based upon the present value of the minimum lease payments… the lessee depreciates the asset, and lease payments are apportioned between interest expense and a reduction of the lease liability.

     

    HSA525_10_2_2_Sophia-1:  You stated that the capital lease is recorded on the balance sheet…can you explain what the entry would reflect? How specifically does a capital lease appear on the company’s balance sheet?

     

    HSA525_10_2_2_ProfQuan-3: A capital lease is recorded on the balance sheet as both an asset and a liability.  As payments are made against the lease, they are recorded as a reduction to the lease liability.

     

    HSA525_10_2_2_Lauren-1: How is depreciation recognized under capital leases on the financial statement?

     

    HSA525_10_2_2_ProfQuan-4: The leased asset incurs a depreciation expense on the income statement which is tax deductible, just as any acquired asset would.

     

    HSA525_10_2_2_Tyler-1:  If the asset is leased, how is it that the organization can report the depreciation?

     

    HSA525_10_2_2_ProfQuan-5:  Keep in mind that under capital leases, the lessee is essentially treated as the owner… Because the lessee is treated as the owner, the lessee can claim depreciation on the asset each year. Consider the lease as a sale….the commitment to the lessor is a debt and therefore, should be treated as any other debt. The asset gets depreciated just as if it were purchased.

    Slide 3Scene 3:

    Professor Quan uses the chalkboard.

    HSA525_10_2_3_ProfQuan-1: If the lease does not meet the criteria for classification as a capital lease, then it shall be classified as an operating lease. The operating lease keeps the equipment cost off the balance sheet, improving critical financial ratios.

     

    HSA525_10_2_3_Lauren-1:  How does this affect the way that the company is viewed by investors and possibly outside analysts?
    HSA525_10_2_3_ProfQuan-2: Since operating leases are not represented on the balance sheet, the financial obligations they represent may go undetected by investors and analysts. This can make the organization appear stronger in terms of its financial ratios, particularly the debt to equity ratio.

     

    HSA525_10_2_3_Tyler-1:  Professor, can an operating lease have a buyout price?

     

    HSA525_10_2_3_ProfQuan-3: No….According to accounting rules, an operating lease cannot have a specific buyout amount. If such an amount is stated, then the lease would automatically be classified as a capital lease.

     

    HSA525_10_2_3_Sophia-1:  You indicated that the lessee is able to claim depreciation, which is an advantage for capital leases. What are some advantages to the healthcare organization in terms of operational leases?

     

    HSA525_10_2_3_ProfQuan-4: Lease payments are operational expenses, so they are fully tax deductible and the operating lease provides improved Return On Asset or ROA without capital budgeting restraints.

    Slide 4Check Your Understanding:

    Each of the following statements is true EXCEPT:

    A. A capital lease is a contract to purchase.

    B. An operating lease is recorded on the balance sheet as both an asset and a liability.

    C. Operating lease payments are operational expenses, so they are fully tax deductible.

    •        Incorrect.  This statement is true.

    •        Correct!  A capital lease is recorded on the balance sheet as both an asset and a liability. The operating lease is not reflected on the balance sheet.

    •        Incorrect.  This statement is true.

     

     

    Slide 5Scene 4:

    Professor Quan uses the projector.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    NAL = Present Value of Purchasing – Present Value of Leasing

    HSA525_10_2_4_ProfQuan-1: Lease versus purchase decisions are made after the decision to acquire the equipment; therefore, the lease versus purchase decision is in fact a financing decision. The decision to purchase has some advantages, which include adding assets to the business, tax depreciation benefits, and the outright ownership of the asset.

     

    HSA525_10_2_4_ProfQuan-2: Leasing also has its advantages. Leasing can provide the organization with more flexibility and financial protection from risks associated with changes in technology. In addition, leasing allows the organization to maintain its cash since very little, if any, upfront cash is required. Moreover, the lease contract contains fewer covenants or restrictions than a lender’s contract if the organization decides to borrow funds to purchase assets.

     

    HSA525_10_2_4_ProfQuan-3: Acquiring assets for the healthcare organization involves a decision making process that must take into account the factors that support the organization’s short and long term goals. The financial manager should carefully weigh the advantages and disadvantages of the option to purchase as well as the option to lease assets.

     

    HSA525_10_2_4_ProfQuan-4: Looks like we are just about out of time.  Let’s go over what we covered.  Today’s lecture focused on the various aspects of leasing, including the tax advantages and the financial reporting of acquired assets. We learned that choosing between owning and leasing equipment is a very important and challenging decision that a manager must make.

     

    Are there any questions?

     

    HSA525_10_2_4_Lauren-1:  What is a typical analysis that a financial manager may use to make such a determination…whether to purchase or lease an asset?

     

    HSA525_10_2_4_ProfQuan-5: Net advantage to leasing or NAL is a standard financial analysis used to determine if it is financially better to lease something rather than borrowing money to purchase the asset. The result of the financial analysis is the amount of money an organization will save or lose if the organization leases as opposed to purchasing an asset. In general, organizations will choose to lease rather than purchase if the net advantage to leasing is positive.

     

    The formula used is NAL equals Present Value of Purchasing minus Present Value of Leasing.

     

    HSA525_10_2_4_ProfQuan-6: As you see, the healthcare financial manager must make important financial decisions that have significant implications for the healthcare organizations. Historically, the purpose of finance has been to borrow and invest the funds needed to enable the organization to meet its goals. Today, the purpose has expanded and now includes the need for the healthcare financial manager to analyze the data provided by managerial accounting to evaluate past decisions in order to make sound decisions regarding future needs of the organization. The financial data gathered by the healthcare financial manager is used to facilitate the process of generating income, responding to regulatory pressures, balance and maintain relationships with third party payers and meet the challenges of the external environment in which the healthcare organization operates.

     

    HSA525_10_2_4_ProfQuan-7: Another very important aspect of healthcare finance is to evaluate the sources of healthcare revenue. Primarily, healthcare organizations are paid by governmental Medicare and Medicaid programs, commercial insurance, including managed care organizations, and directly by the patient.

     

    HSA525_10_2_4_ProfQuan-8: Revenues from governmental payers, such as Medicare and Medicaid, are controlled by complex rules and regulations that control reimbursement rates. Compliance with these rules and regulations is essential for the organization’s ability to maintain this important source of revenue. In addition, these rules and regulations are subject to frequent changes as a result of legislative and administrative action on both the federal and the state levels. For these reasons, revenues from governmental programs change frequently and require regular monitoring by the healthcare organization.

     

    HSA525_10_2_4_ProfQuan-9: Revenues from managed care organizations and other private insurers are subject to contracts and various arrangements that often require discounting customary charge for healthcare services. These discounted arrangements can limit the organization’s ability to increase charges in response to increasing costs. Therefore, active negotiations with these payers are necessary to maintain or increase the pricing of healthcare services relative to costs.

     

    HSA525_10_2_4_ProfQuan-10: An additional source of revenue is the self-pay patient. This source is particularly challenging as self-pay patients often include those that are either uninsured or underinsured.

    Healthcare finance will continue to evolve as organizations seek to improve its revenue cycle management process. As the healthcare environment changes, healthcare managers must be competent and capable of creating policies that can be adjusted and are adaptive to such changes. The revenue management process is, and will likely forever be the lifeblood of the healthcare organization.

     

    This concludes our lecture….

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