Problem: 1-
Consider the following financial statements for Best Care HMO, a not-for-profit managed care plan:
Statement of Operations and Change in Net Assets
Year Ended June 30, 2011
(in thousands)
|
Revenue:
|
|
|
Premiums earned
|
$26,682
|
|
Co-insurance
|
1,689
|
|
Interest and other income
|
242
|
|
Total revenue
|
$28,613
|
|
Expenses:
|
|
|
Salaries and benefits
|
$15,154
|
|
Medical supplies and drugs
|
7,507
|
|
Insurance
|
3,963
|
|
Provision for bad debts
|
19
|
|
Depreciation
|
367
|
|
Interest
|
385
|
|
Total expenses
|
$27,395
|
|
Net income
|
$ 1,218
|
|
Net assets, beginning of year
|
$ 900
|
|
Net assets, end of year
|
$ 2,118
|
Best Care HMO Balance Sheet June 30, 2011 (in thousands)
|
Assets
|
|
| Cash and cash equivalents |
$2737 |
| Net premiums receivable |
821 |
| Supplies |
387 |
|
Total current assets
|
$ 3,945
|
|
Net property and equipment
|
$ 5,924
|
|
Total assets
|
$ 9,869
|
|
Liabilities and Net Assets
|
|
|
Accounts payable-medical services
|
$ 2,145
|
|
Accrued expenses
|
929
|
|
Notes payable
|
141
|
|
Current portion of long-term debt
|
241
|
|
Total current liabilities
|
3 3,456
|
|
Long-term debt
|
$ 4,295
|
|
Total liabilities
|
$ 7,751
|
|
Net assets (equity)
|
$ 2,118
|
|
Total liabilities and net assets
|
$ 9,869
|
a. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows:
|
Total margin
|
3.8%
|
|
Total asset turnover
|
2.1
|
|
Equity multiplier
|
3.2
|
|
Return on equity (ROE)
|
25.5%
|
b. Calculate and interpret the following ratios for BestCare:
|
|
Industy Average
|
| Return on assets (ROA) |
8.0% |
| Current ratio |
1.3 |
| Days cash on hand |
41 days |
| Average collection period Debt ratio |
7 days |
| Debt Ratio |
69% |
| Debt-to-equity ratio |
2.2
|
| Times interest earned (TIE) ratio |
2.8 |
| Fixed asset turnover ratio |
5.2 |
Problem: 2-
Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long-term care facility:
Green Valley Nursing Home, Inc.
Statement of Income and Retained Earnings
Year Ended December 31, 2011
|
Revenue:
|
|
|
Net patient service revenue
|
$ 3,163,258
|
|
Other revenue
|
106,146
|
|
Total revenues
|
$3,269,404
|
|
Expenses:
|
|
|
Salaries and benefits
|
$ 1,515,438
|
|
Medical supplies and drugs
|
966,781
|
|
Insurance In and other
|
296,357
|
|
Provision for bad debts
|
110,000
|
|
Depredation
|
85,000
|
|
Interest
|
206,780
|
|
Total expenses
|
$ 3,180,356 |
|
Operating income
|
$ 89,048
|
|
Provision for income taxes
|
31,167
|
|
Net income
|
$ 57,881
|
|
|
|
|
Retained earnings, beginning of year
|
$ 199,961
|
|
Retained earnings, end of year
|
$ 257,842
|
Green Valley Nursing Home, Inc.
Balance Sheet
December 31, 2011
|
Assets
|
|
| Current Assets: |
|
| Cash |
$ 105,737 |
| Marketable securities |
200,000 |
| Net patient accounts receivable |
215,600 |
| Supplies |
87,655 |
| Total current assets |
$ 608,992 |
| Property and equipment |
$ 2,250,000 |
| Less accumulated depreciation |
356.000 |
| Net property and equipment |
$ 1,894,000 |
| Total assets |
$ 2,502,992 |
| Liabilities and Shareholders' Equity |
|
| Current Liabilities: |
|
| Accounts payable |
$ 72,250 |
| Accrued expenses |
192,900 |
| Notes payable |
100,000
|
| Current portion of long-term debt |
80,000 |
| Total current liabilities |
$ 445,150 |
| Long-term debt |
$ 1,700,000
|
| Shareholders' Equity: |
|
| Common stock, $10 par value |
$ 100,000 |
| Retained earnings |
257,842 |
| Total shareholders' equity |
$ 357,842
|
| Total liabilities and shareholders' equity |
$ 2,502,992
|
a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows:
| Total margin |
3.5%
|
| Total asset turnover |
1.5 |
| Equity multiplier |
2.5 |
| Return on equity (ROE) |
13.1% |
b. Calculate and interpret the following ratios:
| |
Industry Average
|
| Return on assets (ROA) |
5.2% |
| Current ratio |
2.0
|
| Days cash on hand |
22 days |
| Average collection period |
19 days |
| Debt ratio |
71% |
| Debt-to-equity ratio |
2.5 |
| Times interest earned (TIE) ratio |
2.6 |
| Fixed asset turnover ratio |
1.4 |
c. Assume that there are 10,000 shares of Green Valley's stock outstanding and that some recently sold for $45 per share.
• What is the firm's price/earnings ratio?
• What is its market/book ratio?
17.6 Examine the industry average ratios given in problems 1 and 2. Explain why the ratios are different between the managed care and nursing home industries.