Problems
1 a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio?
- Use cash to pay off current liabilities.
- Collect some of the current accounts receivable.
- Use cash to pay off some long-term debt.
- Purchase additional inventory on credit (i.e., accounts payable).
- Sell some of the existing inventory at cost.
b. Assume that the company has a current ratio of 1.2. Now which of the above actions would improve this ratio?
2. Southwest Physicians, a medical group practice, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to have a profit margin of 5 percent. The group is considering two financing alternatives. First, it can use all-equity financing by requiring each physician to contribute his or her pro rata share. Alternatively, the practice can finance up to 50 percent of its assets with a bank loan. Assuming that the debt alternative has no impact on the expected profit margin, what is the difference between the expected ROE if the group finances with 50
percent debt versus the expected ROE if it finances entirely with aluitv capital?
3. Riverside Memorial's primary financial statements are presented.
a. Calculate Riverside's financial ratios tbr 2010. Assume that Riverside had $1,000,000 in lease payments and $1,400,000 in debt principal repayments in 2010. (Hint: Use the book discussion to identify the applicable ratios.)
b. Interpret the ratios. Use both trend and comparative analyses. For the comparative analysis, assume that the industry average data presented in the book is valid fbr both 2010 and 2011.
4. Consider the tbllowing financial statements fir BestCare HMO, a not-for-profit managed care plan:
Best care HMO
Statement of Operations and Change in Net Assets
Year Ended June 30, 2011
(in thousands)
|
Revenue:
|
|
|
Premiums earned
|
526,682
|
|
Co-insurance
|
1,689
|
|
Interest and other income
|
242
|
|
Total revenue
|
528,613
|
|
Expenses:
|
|
|
Salaries and benefits
|
S15,154
|
|
Medical supplies and drugs
|
7,507
|
|
Insurance
|
3,963
|
|
Provision Mr had debts
|
19
|
|
Depreciation
|
367
|
|
Interest
|
385
|
|
Total expenses
|
527,395
|
|
Net income
|
S1,218
|
|
Net assets, beginning of year
|
S900
|
|
Net assets, end of year
|
$ 2,118
|
BestCare HMO
Balance Sheet
June 30, 2011 (in thousands)
|
Assets
|
|
|
Cash and cash equivalents
|
S 2,737
|
|
Net premiums receivable
|
811
|
|
Supplies
|
387
|
|
Tinal current assets
|
S 3,945
|
|
Net property and equipment
|
S 5,924
|
|
Total assets
|
S 9,869
|
|
Liabilities and Net Assets
|
|
|
Accounts payable-medical services
|
S 2,145
|
|
Accrued expenses
|
929
|
|
Notes payable
|
11 I
|
|
Current portion of long-term debt
|
241
|
|
Total current liabiliti6
|
S 3.456
|
|
Longterm debt
|
S 4.'195
|
|
Total liabilities
|
S 7,751
|
|
Net assets (equity)
|
S 2.118
|
|
Taal liabilities and net assets
|
S 9N69
|
a. Problem 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 fdlowing ratios for Best( are: Industry Average
Return nn assets 4ROA) 8.0%
Current ratio 1.3
Days cash on hand 41 days
A'trage collection period 7 days
Debt ratio 69%
Debt-to-equity ratio 2.2
Times interest earned (TIE) ratio 2.8
Fixed asset turnover ratio 5.2
5. Consider the following financial statements for Green valley nursing Home, Inc., a tear-profit, long-term care facility:
Green valley nursing home
Statement of Income and Retained Earning
Year ended December 31, 2011
Revenue:
Net patient service revenue S 3.163,258
Other revenue 106,146
Total revenue S 3,269,404
Expenses:
Salaries and benefits S 1,515,438
Medical supplies and drugs 966.781
Insurance and other 296,357
Provision for bad debt. 110600
depreciation 85,000
Interest 206,780
Tout expenses S 3,180,356
Operating income S .89.048
Provision for income taxes 31.167
Net Income 57,881
Retained earnings, beginning .1 4 year S 199.961
Retained earnings, end of war S 257,842
Groan Valley nursing Home, Inc.
Balance Slum
December 31, 2011
Assets
Current Assets:
Cash S 105,737
Marketable securities 200.000
Net patient accounts receivable 215,600
Supplies 87,655
Total current assets S 608,992
Property and equipment S 2,250,000
Less accumulated depreciation 356.000
Net Property and equipment 5 1894,000
Total assets 5 2592.992
a. Perform a Du Pont analysis on Green kAey. Assume that the industry average ratios arc as follows:
Trotal margin - 3.5%
Total asset turnover 1.3
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
Times interest earned (TIE) ratio 2.6
Fixed asset turnover ratio 1.4
c. Assume that there are 10,000 shares or Green 1"alley's stock outstanding and that some recently sold fOr $45 per share.
- What is the firm's price/earnings ratio?
- What is its market/hook ratio?
17.6 Examine the industry average ratios given in problems 17.4 and 1 Explain why the ratios are different between the managed care nursing home industries.