First, consider some basic background information concerning the differences between not-for-profit organizations and investor-owned firms. What is fund capital? How is the cost of fund capital estimated?

Question

Sandra McCloud, a finance major in her last term of college, is currently scheduling her placement interviews through the university's career resource center. Her list of companies is typical of most finance majors: several commercial banks, a few industrial firms, and one brokerage house. However, she noticed that a representative of a not-for-profit hospital is scheduling interviews next week, and the position--that of financial analyst--appears to be exactly what Sandra has in mind. Sandra wants to sign up for an interview, but she is concerned that she knows nothing about not-for-profit organizations and how they differ from the investor-owned firms that she has learned about in her finance classes. In spite of her worries, Sandra scheduled an appointment with the hospital representative, and she now wants to learn more about not-for-profit businesses before the interview.
To begin the learning process, Sandra drew up the following set of questions. See if you can help her answer them.

Answer 1

Unlike investor-owned firms that raise equity capital by selling new common shares and retaining earnings, not-for-profit firms raise the equivalent of equity capital, called fund capital, by retaining profits, receiving government grants, and receiving private contributions. The cost of fund capital is an opportunity cost to the not-for-profit firm; namely, the return the firm could realize by investing the capital in securities of similar risk. For example, the opportunity cost of fund capital to a not-for-profit hospital would be the return it could realize by investing in the securities of a comparable investor-owned hospital.