Calculations Shown

On a typical day, U.C. Stars Vision Center writes $80,000 in checks, which take five days to clear. They receive an average of $100,000 in checks from patients on a daily basis, which take three days to clear.

a. (3 Points) What is U.C.’s disbursement float?

b. (3 Points) What is U.C.’s collections float?

c. (2 Points) What is U.C.’s net float?

d. (2 Points) Does this mean for U.C. will need to fund, or invest the float?

PROBLEMS – Solve the following. Show/Explain your work!

II. Meds R Us has just finished evaluating several projects. Their cost of capital is 10%. NPV’s are calculated by the firm’s current cost of capital.

Project Cost

A $21,000

B $ 3,000

C $15,000

D $14,000

E $17,000

NPV IRR $5,000 12% $ -500 8% $2,000 19% $4,000 14% $4,000 17%

A. (5 Points) With no capital rationing, and assuming the projects are of the same risk, which projects should Meds R Us accept? Why?

B. (6 Points) If Meds R Us has a Capital Budget limit of $40,000, and assuming the projects are of the same risk, which projects should they accept? Why?

C. (6 Points) Meds R Us now performs a risk assessment of the projects.

They adjust for project risk by raising the calculated IRR by 2% for low risk projects, leaving the IRR the same for moderate risk projects, and lowering the calculated IRR by 3% for high risk projects. Without capital rationing, which projects should Meds R Us accept? Why?

Project Cost

A $21,000

B $ 3,000

C $15,000

D $14,000

E $17,000

NPV $5,000 $ -500 $2,000 $4,000 $4,000

Risk

IRR Level 12% High

8% Low 19% High 14% Mod. 17% Low

D. (6 Points) Considering the risk assessment in Part C above, if Meds R Us has a Capital Budget limit of $40,000, which projects should they accept? Why?

III. Consider the following financial statements for nonprofit Dispatch & Patch Emergency Services:

Dispatch & Patch Emergency Services Statement of Operations and Change in net Assets Year Ended December 31, 2014

Revenue:

Insurance Proceeds

Co-Payments

Interest and Other Income

Total Revenues

Expenses:

Salaries and Benefits

Depreciation

Provision for Bad Debts Supplies

Insurance

Interest

Total Expenses Net Income

$30,000 4,500 300

$34,800  

$20,000 2,000 1,500 1,300 1,000

200 $26,000

Net Assets, January 1, 2014 Net Assets, December 31, 2014

 Dispatch & Patch Emergency Services Balance Sheet

31-Dec-14

$ $ $

$

8,800 400 9,200

Assets: Cash

2,200 1,200 100 3,500

Patient Accounts Receivable Supplies

Total Current Assets Net Fixed Assets

Total Assets

Liabilities:

Accounts Payable

Accrued Expenses Current Long-term debt

Total Current Liabilities

Long-term Debt Total Liabilities

Net Assets (Total Equity) Total liabilities and Net Assets

$ $18,400 $21,900

2,300 1,400 1,000 $ 4,700

$ 8,000 $12,700

$ 9,200 $21,900

Assume the industry average ratios are:

Total margin 3.5% Total Asset Turnover 2.0 Equity Multiplier 3.0 Return on Equity (ROE) 21.0% Return on Assets (ROA) 7.0% Current Ratio 1.2

Days Cash on Hand Average collection period Debt ratio Debt-to-Equity ratio Times Interest Earned Fixed Asset Turnover

40 days 10 days

67% 2.0 3.2 6.0

A. (6 Points) Perform a Du Pont analysis on Dispatch & Patch. Comment on what the results imply.