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Case Study: Capital Structure Decisions (100 points)

Consider the following scenario:

XYZ Health Organization has a division that currently uses zero debt financing. Assume that the operating income (EBIT) is 1,000,000 SAR. Assume that the firm has 5,000,000 SAR in Assets with an equal amount in equity (because it currently has no debt). The firm wants to expand its product offerings and is considering replacing half of its equity financing with debt financing at an interest rate of 8%. The corporate tax rate is 20%. Assume that you are the Chief Financial Officer of the organization.

  1. Determine how the new capital structure would impact the firm’s net income, total dollar return to investors, and ROE?
  2. Conduct the analysis again but assume that the cost of debt has risen to 15%?
  3. Then using the original 8% interest rate, assume that annual EBIT has dropped to 500,000 SAR or could go as high as 1.5 million SAR (both with a probability of 20%). While there is a 60% chance that EBIT will remain 1,000,000 SAR. Redo the analysis for each level of EBIT and determine the expected values for the division’s net income, total dollar return to investors, and ROE.

After you have conducted all the calculations, make recommendations to the company as to which avenue the company should take. Consider what you have learned about the healthcare needs under SV2030 as well as your knowledge of the healthcare industry.

Discuss the considerations for risk and return for western investors who will be entering into Islamic financing arrangements. How will those investors consider the risk of this business endeavor?

  1. Issue sukuk for the debt financing (make calculation in accordance with the principles of debt financing so that you may conduct the financial analysis).
  2. Using equity for financing and some borrowing (your project would be financed in accordance with Murabaha principles but for the convenience of calculations, you will use the processes of a conventional loan and/or issuing equity in the organization).

Make recommendations to the organization as to the course of action that they should follow considering all risk factors. Please make certain that you show your calculations. Submit your findings in a proposal to the hospital.

  • You must show all your calculations for credit. Your calculations for this assignment must be submitted as an Excel file, identified as Appendix A, and included as part of the Word document submission.

Your paper should meet the following structural requirements:

  • The paper should be 4–5 pages in length, not including the cover sheet and reference page.
  • The paper should be formatted according to APAwriting standards.
  • Provide support for your financial statements with in–text citations from a minimum of four scholarly articles.
  • Two of these sources may be from the class readings or textbook, but the others must be external and come from peer–reviewed journals.
  • The Saudi Digital Library is a good place to find these references.

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