Chapter 17
- 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?
- 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
- 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?
- 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.