First, consider some basic background information concerning the differences between not-for-profit organizations and investor-owned firms. What impact does the inability to issue common stock have on a not-for-profit business's capital structure and capital budgeting decisions?

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.

The inability to issue common stock has a significant impact on a not-for-profit firm's financial flexibility. First, the lack of access to equity capital effectively imposes capital rationing, so the firm may not be able to undertake all projects deemed worthwhile. Second, in order to invest in projects considered necessary, the firm may have to take on more than the optimal amount of debt capital.