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.

HADM 6306 – Spring 2015 FINAL EXAM

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

I. 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?

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 NPV IRR

A $21,000 $5,000 12%

B $ 3,000 $ -500 8%

C $15,000 $2,000 19%

D $14,000 $4,000 14%

E $17,000 $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?

Risk

Project Cost NPV IRR Level

A $21,000 $5,000 12% High

B $ 3,000 $ -500 8% Low

C $15,000 $2,000 19% High

D $14,000 $4,000 14% Mod.

E $17,000 $4,000 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 $30,000

Co-Payments 4,500

Interest and Other Income 300

Total Revenues $34,800

Expenses:

Salaries and Benefits $20,000

Depreciation 2,000

Provision for Bad Debts 1,500

Supplies 1,300

Insurance 1,000

Interest 200

Total Expenses $26,000

Net Income $ 8,800

Net Assets, January 1, 2014 $ 400

Net Assets, December 31, 2014 $ 9,200

Dispatch & Patch Emergency Services

Balance Sheet

December 31, 2014

Assets:

Cash $ 2,200

Patient Accounts Receivable 1,200

Supplies 100

Total Current Assets $ 3,500

Net Fixed Assets $18,400

Total Assets $21,900

Liabilities:

Accounts Payable $ 2,300

Accrued Expenses 1,400

Current Long-term debt 1,000

Total Current Liabilities $ 4,700

Long-term Debt $ 8,000

Total Liabilities $12,700

Net Assets (Total Equity) $ 9,200

Total liabilities and Net Assets $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 40 days

Average collection period 10 days

Debt ratio 67%

Debt-to-Equity ratio 2.0

Times Interest Earned 3.2

Fixed Asset Turnover 6.0

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

B. (21 Points) For Dispatch & Patch, calculate the following ratios and give a one or two sentence comment on what the value of their ratio means in light of the industry average:

1. Return on Assets

2. Current Ratio

3. Days Cash on Hand

4. Average collection period

5. Debt-to-Equity ratio

6. Times Interest Earned

7. Fixed Asset Turnover