Finance Assignment

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Problem 1

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
		Chapter 13 -- Financial Condition Analysis
PROBLEM 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?
ANSWER

Problem 2

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
		Chapter 13 -- Financial Condition Analysis
PROBLEM 2
Southwest Physicians, a medical group practice, is just being formed. It will need $2 million of total
assets to generate $3 million in revenues. Furthermore, the group expects to have a profit margin of 5
percent. The group is considering two financing alternatives. First, it can use all-equity financing by
requiring each physician to contribute his or her pro rata share. Alternatively, the practice can finance
up to 50 percent of its assets with a bank loan. Assuming that the debt alternative has no impact on the
expected profit margin, what is the difference between the expected ROE if the group finances with 50
percent debt versus the expected ROE if it finances entirely with equity capital?
ANSWER

Problem 3

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
		Chapter 13 -- Financial Condition Analysis
PROBLEM 3
Bayside Memorial Hospital's financial statements are presented in Tables 13.1, 13.2, and 13.3.
a. Calculate Bayside's financial ratios for 2009. Assume that Bayside had $1 million in lease
payments and $1.4 million in debt principal repayments in 2009. (Hint: use the book discussion to
identify the applicable ratios.)
b. Interpret the ratios. Use both trend and comparative analysis. For the comparative analysis, assume
that the industry average data presented in the book is valid for both 2009 and 2010.
ANSWER

Problem 4

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
		Chapter 13 -- Financial Condition Analysis
PROBLEM 4
Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:
			BestCare HMO
		Statement of Operations and Change in Net Assets
			Year Ended June 30, 2XXX
			(in thousands)
Revenue:
Premiums earned				$26,682
Coinsurance				$1,689
Interest and other income				$242
Total revenue				$28,613
Expenses:
Salaries and benefits				$15,154
Medical supplies and drugs				$7,507
Insurance				$3,963
Provision for bad debts				$19
Depreciation				$367
Interest				$385
Total expenses				$27,395
Net income				$1,218
Net assets, beginning of year				$900
Net assets, end of year				$2,118
			BestCare HMO
			Balance Sheet
			Year Ended June 30, 2XXX
			(in thousands)
Assets
Cash and cash equivalents				$2,737
Net premiums receivable				$821
Supplies				$387
Total current assets				$3,945
Net property and equipment				$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 Pont analysis on BestCare. Assume that the industry average ratios are as follows:
	Total margin			3.8%
	Total asset turnover			2.1
	Equity multiplier			3.2
	Return on equity (ROE)			25.5%
b. Calculate and interpret the following ratios for BestCare:
				Industry average
	Return on assets (ROA)			8.0%
	Current ratio			1.3
	Days cash on hand			41 days
	Average collection period			7 days
	Debt ratio			69%
	Debt-to-equity ratio			2.2
	Times interest earned (TIE) ratio			2.8
	Fixed asset turnover ratio			5.2
ANSWER

Problem 5

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
		Chapter 13 -- Financial Condition Analysis
PROBLEM 5
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, 2XXX
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
Operating 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
			Year Ended December 31, 2XXX
Assets
Current Assets:
Cash				$105,737
Marketable securities				$200,000
Net patient accounts 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:
Accounts 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 Pont analysis on Green Valley. Assume that the industry average ratios are as follows:
	Total margin			3.5%
	Total asset 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 (ROA)			5.2%
	Current ratio			2.0
	Days cash on hand			22 days
	Average collection period			19 days
	Debt ratio			69%
	Debt-to-equity ratio			2.5
	Times interest earned (TIE) ratio			2.6
	Fixed asset turnover ratio			1.4
c. Assume that there are 10,000 shares of Green Valley's 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?
ANSWER

Problem 6

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
		Chapter 13 -- Financial Condition Analysis
PROBLEM 6
Examine the industry average ratios given in Problems 4 and 5. Explain why the ratios are different
between the managed care and nursing home industries.
ANSWER