Article 2

RATIO BENCHMARK AND MEDIAN TABLE

Ratio

Benchmark - 50th Percentile) for Comparable Physician Group Practices

Median for Comparable Physician Group Practices

Current Ratio

*2.2

2

Quick Ratio

*1.74

1

Debt Service Coverage Ratio

*1.49

1.1

Operating Margin

*4.45

2.6

Return on Total Assets

*4.04%

4.05%

PART 1:

CALCULATION of FINANCIAL RATIOS:

Below are five financial ratios. In each of the columns, you will be responsible for showing the calculation for each based off Dr. Smith and Brown’s financial statements (located with the textbook). You will need to identify the type of ratio as well. Choices for the type of ratio are:

LIQUIDITY, SOLVENCY, PROFITABILITY or N/A.

EXAMPLE for the INVENTORY TURNOVER RATIO:

Show Calculation: 180,000/5000 = 36

Identify the type of ratio: n/a

CURRENT RATIO

QUICK RATIO

DEBT SERVICE COVERAGE RATIO

OPERATING MARGIN

RETURN ON TOTAL ASSETS

Show calculation in the box provided:

Identify the type of ratio:

Show calculation in the box provided:

Identify the type of ratio:

Show calculation: (For this ratio, the denominator you will use is 22,200)

Identify the type of ratio:

Show calculation in the box provided:

Identify the type of ratio:

Show calculation in the box provided:

Identify the type of ratio:

PART 2:

TYPE OF RATIOS

In your own words, define the meaning of each ratio: liquidity, solvency, and profitability.

Liquidity

Solvency

Profitability

PART 3:

OPERATING RATIOS

Define the financial ratios listed below. Next, analyze the result for each ratio calculated above and explain what the calculated result tells you about the financial health of Dr. Smith and Dr. Brown’s physician practice

EXAMPLE:

INVENTORY TURNOVER RATIO

DEFINE: Inventory turnover is calculated to determine how quickly the inventory is used based on the services rendered. If the inventory turnover is high, this means the hospital does not have enough inventories on hand to accommodate the patient load. ANALYSIS: For this example, the hospital is turning over their inventory 36 times per year, which is about 3 times a month. The opposite is true if the inventory turnover calculation is lower than the median. FINANCIAL HEALTH: This could mean that there is a build-up of inventory due to lower than expected patient revenues.

1) CURRENT RATIO

2) QUICK RATIO

3) DEBT SERVICE COVERAGE RATIO

4) OPERATING MARGIN

5) RETURN ON TOTAL ASSETS

PART 4:

CAPITAL BUDGET EXPENDITURES - TIME VALUE OF MONEY CALCULATIONS

Complete the tables below by computing the following time value of money calculations: Present Value, Internal Rate of Return, and Pay Back Period for the capital expenditures for Dr. Smith and Brown’s physician practice. Enter the result of the calculation into the blank cells.

PRESENT VALUE

CE/Amount

Compounding Period

Rate of Interest

Present Value

Laboratory: $70,000

Annual

4% for 15 years

EMR Software: $125,000

Annual

6% for 10 years

INTERNAL RATE OF RETURN

Initial cost of Investment

Periods of Useful life

Estimated annual net cash inflow generated

Look-up table value

Rate of Interest

e-prescribing software:

$ 75,000

10

$10,190

Lab equipment: $ 58,000

6

$14,108

PAY BACK PERIOD

(assume no taxes are being paid)

Equipment Purchase Price

Period of Useful Life

Increased Annual Revenue Generated per Year

Operating Costs Associated with Revenue

Depreciation Expense per Year

Pay Back Period

EMR System: $350,000

10 years

$100,000

$32,000

$45,000

Integrated Billing System: $300,000

10 years

$95,000

$27,000

$36,000

PART 5:

EVALUATION OF CAPITAL BUDGET EXPENDITURES

As a Health Care Manager, you will be responsible for operational decisions by applying financial management principals. For Part 5, you will apply the concepts of the Time Value of Money to define, analyze, and rationalize your findings from the Financial and Operation ratio results to make informed decisions regarding capital expenditures for Dr. Smith and Brown’s physician practice. Include any government or regulatory mandate information that you considered when making your decision. Complete each of the cells below.

Define the time value of money.

Provide a real-world example for the time value of money.

Why is time such an important factor when considering a capital expenditure?

After review of the financial statements and ratios, analyze the feasibility that the Capital Expenditure listed above would benefit Dr. Smith and Dr. Brown’s practice. Explain your rationale on whether you would recommend the purchase of the capital expenditures identified. Include any positive or negative aspects of regulatory or government mandates that were considered in making the decision to purchase the capital expenditures.

REFERENCES

List the references you used to complete this assignment.

You must format the references in APA format as outlined in 6th edition guidelines found at the AU Writing Center. Comment by Author: Link to AU Writing Center APA formattingURL is: https://awc.ashford.edu/cd-apa-key-elements.html