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Chapter 17

    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?

    1. Consider the following financial statements for Best Care HMO, a not-for profit managed care plan

Best Care HMO

Statement of Operations and Changes 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

 

Expense:

      Salaries and benefits                                                    $15,154

         Medical supplies and drugs                                         7,507

          Insurance                                                                     3,963

           Provision for bad debt                                                19

            Depreciation                                                               367

            Interest                                                                       385

                    Total Expenses                                                 $27,395

          Net income                                                                 $1,218

          Net asset, 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                                              $2,737

Net premiums receivable                                                       821

Supplies                                                                               387

               Total current assets                                             $3,945

Net property and equipment’s                                              $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                                                          $3,456

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 Point analysis on Best Care. Assume that the industry average ratios are as follows:

Total margin 3.8%

Total assets turnover     2.1

Equity multiplier 3.2

Return on equity (ROE) 25.5%

b.       Calculate and interpret the following ratios for Best Care:

 

                                Industry Average

Return on assets (ROE)                                           8.0%

Current ratio                                                             1.3

Days cash on hand                                                   41 days

Average collection period                                             7days

Debt ratio                                                                     69%

Debt to equity ratio                                                       2.2

Time interest earned (TIE) ratio                                    2.8

Fixed asset turnover ratio                                               5.2

    1. 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 and other                                                                      296,357

Provision for bad debts                                                                  110,000

Depreciation                                                                                      85,000

 Interest                                                                                             206,780

    Total expenses                                                                              $3,180,356

Operation 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

Market securities                                                             200,000

Net patient account 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:

Account 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 point analysis on Green Valley. Assume that the industry average ratios are follows

             Total margin                                  3.5%

             Total assets 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 (ROE)                      5.2%

Current ratio                                        2.0

Days cash on hand                                 22days

Average collection period                     19 days

Debt ratio                                                71%

Debt – to- equity ratio                             2.5

Time interest earned (TIE) ratio               2.6

Fixed assets turnover ratio                        1.4

c.       Assume that there are 10,000 shares of Green Valleys 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?

 

 

    1. Examine the industry average ratios given in problem 17.4 and 17.5. explain why the ratios are different between the managed care and nursing home industries.

 

 

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