Strategy of Shareholder Wealth Maximization Assessment

Assessment 

As an aspiring manager you are tasked with creating a report which covers the following topics:

1. Discuss and assess the importance of accounting and finance functions in the operations of a healthcare organization, either in the public or private sector.

2. Within academic literature it is said that the primary objective of a company is maximize the owner’s wealth. Critically discuss why a healthcare organisation is unlikely to pursue a strategy of Shareholder Wealth Maximization.

(note: if your organisations is government owned/funded, they are effectively the majority shareholder) 

3. KSA Sovereign Fund is looking to take on a new investment offering private healthcare treatments. The company will evaluate two mutually exclusive projects, whose details are given below. The company’s cost of capital is 9%.

• Calculate the Payback period
• Calculate the Net Present Value (NPV) of both projects
• Calculate the Internal Rate of Return (IRR) of both projects 
• Critically discuss the merits of each investment appraisal method, then discuss the result of the evaluations you have made of the two projects and advise the company which project should be undertaken

4. Critically evaluate the use of a Balanced Scorecard in your organisations (or a previous organisations you have worked in) a.

• Outline the Key Strategy (What is the overall goal?) 
• Develop a series of metrics based on Financial Performance, Customer, Internal Processes and finally Learning and Growth 
• Explain and identify how your Key Performance Indicators (KPIs) will meet the strategy goals
• Evaluate the challenges, discuss the risks of your organisation within the Balanced Scorecard and the challenges to achieving the goals in point 4c

5. Riyad Hospital Trust is considering an investment into Hospital Information System; it has two choices via leasing or buying the software and equipment.

The purchase price is SAR 1,275,000 and the machine has a 6-year life. If it buys the software Riyad Hospital Trust will need to fund it using capital that costs them 6% per year. Riyad HT estimates maintenance of the system will be SAR 30,000 per annum. Alternatively, the lease payments will be SAR 220,000 per year for 6 years with rentals payable at the start of each year.

• What are the respective present value costs of purchasing the machine or leasing it?
• Consider the theoretical cost of Debt, Preference Shares and Ordinary Shares rank them from most expensive to cheapest. 
• Recently one of your company directors has attended a finance conference, on their return the director has decided the company should fund all projects with debt financing as they are ‘always cheaper than equity’. Critically discuss if you agree with this statement.
• Discuss whether the company should raise finance (via any means) if it has a project available with a net present value of SAR 100million

Summary of Assessment Requirements

The assessment requires aspiring managers to prepare a comprehensive report covering both theoretical and practical aspects of accounting and finance within healthcare organizations. The key tasks include:

1. Accounting and Finance in Healthcare Operations – Assessing the importance of financial functions in either public or private sector healthcare.
2. Shareholder Wealth Maximization (SWM) – Critically discussing why healthcare organizations may not follow a pure SWM strategy, considering their social and service-oriented role.
3. Investment Appraisal for KSA Sovereign Fund – Evaluating two mutually exclusive projects using:
   • Payback Period
   • Net Present Value (NPV)
   • Internal Rate of Return (IRR)
   • Critical discussion of methods and final recommendation.
4. Balanced Scorecard Evaluation – Developing a performance framework by:
   • Outlining key strategy/goals
   • Creating metrics under Financial, Customer, Internal Processes, and Learning & Growth perspectives
   • Linking KPIs to strategy
   • Discussing risks, challenges, and limitations.
5. Financing Decisions at Riyad Hospital Trust – Comparing leasing vs buying a Hospital Information System by:
   • Calculating present value costs
   • Ranking funding sources (Debt, Preference Shares, Equity)
   • Critically discussing the director’s assumption on debt financing
   • Evaluating whether finance should be raised for a project with SAR 100 million NPV.

Step-by-Step Academic Mentor Guidance

Step 1: Understanding the Scope

The mentor began by breaking down each question into manageable parts to ensure clarity. The student was guided to treat each section as a standalone mini-report, supported by theory, legislation, and calculations where applicable.

Step 2: Addressing Accounting and Finance in Healthcare

• Mentor advised starting with a discussion on roles of accounting and finance: budgeting, cost control, reporting, and ensuring sustainability.
• Student was guided to integrate sector-specific challenges (public accountability, service quality, resource allocation).

Step 3: Critiquing Shareholder Wealth Maximization

• The mentor explained the traditional corporate finance objective of SWM.
• Student was directed to contrast commercial motives vs healthcare mission (public welfare, ethical considerations, patient care).
• Examples of government-funded healthcare were used to reinforce arguments.

Step 4: Investment Appraisal (KSA Sovereign Fund Case)

• Mentor introduced formulas for Payback Period, NPV, and IRR with step-by-step calculations.
• Each method’s strengths and weaknesses were explained (simplicity vs accuracy, cash flow timing, risk considerations).
• Student was encouraged to critically justify the final recommendation with both quantitative results and qualitative reasoning.

Step 5: Balanced Scorecard Framework

• Mentor guided the student to define a clear organizational strategy first.
• Then helped to build KPIs across four perspectives:
  • Financial (cost efficiency, revenue growth)
  • Customer (patient satisfaction, access to services)
  • Internal Processes (waiting times, error rates)
  • Learning & Growth (staff training, innovation adoption).

• Student was shown how to link each KPI to strategic objectives and discuss practical risks and barriers (budget constraints, staff resistance).

Step 6: Leasing vs Buying Decision (Riyad Hospital Trust)

• Mentor demonstrated how to compute present value of both options using discounting.
• Funding sources were ranked with theoretical backing (cost of debt < preference>
• Student was guided to challenge the director’s claim, highlighting risk, debt burden, and capital structure balance.
• Finally, the SAR 100 million NPV case was used to stress that positive NPV projects should not be rejected due to financing myths.

Final Outcome & Learning Objectives Achieved

By following the mentor’s guidance, the student produced a structured, well-argued, and evidence-based report. The approach ensured:

• Deep understanding of accounting and finance roles in healthcare.
• Ability to critically evaluate financial objectives beyond shareholder wealth.
• Proficiency in applying investment appraisal techniques and making informed recommendations.
• Skills to design and critique a Balanced Scorecard framework for organizational performance.
• Practical knowledge of financing decisions, including cost of capital and capital structure debates.

Learning Objectives Covered:

• Analytical skills in financial management and decision-making.
• Application of theory (SWM, capital structure, appraisal methods) to real-world healthcare contexts.
• Critical thinking and evaluation of multiple perspectives.
• Professional report-writing and structured problem-solving.

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