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H2C PERSPECTIVE

What's Our Cost of Capital?

By Richard I. Rollo

September 16, 2020

… and other tricky questions from not-for-profit hospitals and health systems

About Hammond Hanlon Camp LLC

 

Hammond Hanlon Camp LLC (“H2C”) is an independent strategic advisory and investment banking firm with a singular focus on health care. Our commitment to exceed our clients’ expectations begins with senior leadership on every engagement and continues with independent and objective strategic advice. Our belief in the markets and in the power of competition has resulted in loyal clients and long-term relationships.

 

The experienced professionals at H2C are well positioned to serve as your trusted advisors. We have the expertise to understand the unique complexities of the healthcare industry and an in-depth knowledge of the range of potential alternatives essential to designing and implementing highly successful business and financial strategies. We bring in-depth knowledge and experience across the full continuum of care and across a wide range of healthcare-related businesses.

 

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Kelly T. Duong

Hammond Hanlon Camp LLC

858.242.4810

kduong@h2c.com

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At H2C, we frequently get this question from our clients: “What is our cost of capital?” It’s an important question that would seem to have a straightforward answer. But like many important questions, the answer requires context and knowledge.  As such, we address the following in this article:

 

  • How cost of capital is determined

  • How to think about taxes as a not-for-profit

  • NPV, IRR, TV, and other “alphabet soup” items

 

There are two major reasons why not-for-profit hospitals and health systems should care about this topic:

 

  1. Return on capital is what was achieved rather than what was planned when using the appropriate cost of capital or hurdle rate; return on capital in excess of cost of capital is what growth is made of.
     

  2. Getting cost of capital wrong—and possibly overpaying—may risk loss of an organization’s tax-exempt status if that overpayment is found to be private inurement.

 

Click below to read the full article.

About the Author
 

Richard Rollo is a Managing Director for Hammond Hanlon Camp LLC, where he is a leader for the firm’s Healthcare Strategic Advisory and Mergers & Acquisitions (“M&A”) teams. Richard has more than 25 years of experience as a senior executive leading corporate finance, strategy, planning, M&A, and development functions in health care, energy, and

financial services. Contact Richard at rrollo@h2c.com.

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