Finance Questions
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chapter-15-problem-1-and-2.xlsProblem 1
| UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT | 5/1/10 | |||||||
| Chapter 15 -- Working Capital Management | ||||||||
| PROBLEM 1 | ||||||||
| On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those | ||||||||
| checks to clear. Each day the clinic typically receives $1,000 in checks that take three days to clear. | ||||||||
| What is the clinic's average net float? | ||||||||
| ANSWER |
Problem 2
| UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT | ||
| Chapter 15 -- Working Capital Management | ||
| PROBLEM 2 | ||
| Drugs 'R Us operates a mail order pharmaceutical business on the West Coast. The firm receives an | ||
| average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment, | ||
| from the time customers mail their checks to the time the firm receives and processes them. A lockbox | ||
| system that consists of ten local depository banks and a concentration bank in San Francisco would cost | ||
| $6,500 per month. Under this system, customers' checks would be received at the lockbox locations one | ||
| day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75 | ||
| each. Assume that the firm can earn 10 percent on marketable securities and that there are 260 | ||
| working days and hence 260 transfers from each of the ten lockbox locations per year. | ||
| a. What is the total annual cost of operating the lockbox system? | ||
| b. What is the dollar benefit of the system to Drugs'R Us? | ||
| c. Should the firm initiate the lockbox system? | ||
| ANSWER |
Problem 3
| UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT | ||
| Chapter 15 -- Working Capital Management | ||
| PROBLEM 3 | ||
| Suppose one of the suppliers to Seattle Health System offers terms of 3/20, net 60. | ||
| a. When does the system have to pay its bills from this supplier? | ||
| b. What is the approximate percentage cost of the costly trade credit offered by this supplier? (Assume | ||
| 360 days per year.) | ||
| ANSWER |
Problem 4
| UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT | ||
| Chapter 15 -- Working Capital Management | ||
| PROBLEM 4 | ||
| Langley Clinics, Inc. buys $400,000 in medical supplies a year (at gross prices) from its major supplier, | ||
| Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the | ||
| supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and | ||
| replacing the trade credit with a bank loan that has a 10 percent annual cost. | ||
| a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume | ||
| 360 days per year throughout this problem.) | ||
| b. What is the amount of costly trade credit? | ||
| c. What is the approximate annual percentage cost of the costly trade credit? | ||
| d. Should Langley replace its trade credit with the bank loan? Explain your answer. | ||
| e. If the bank loan is used, how much of the trade credit should be replaced? | ||
| ANSWER |
Problem 5
| UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT | ||
| Chapter 15 -- Working Capital Management | ||
| PROBLEM 5 | ||
| Milwaukee Surgical Supplies, Inc. sells on terms of 3/10, net 30. Net sales for the year are | ||
| $1.2 million, and the collections department estimates that 30 percent of the customers pay on the tenth | ||
| day and take discounts; 40 percent pay on the thirtieth day; and the remaining 30 percent pay, on average, | ||
| 40 days after the purchase. (Assume 360 days per year.) | ||
| a. What is the firm's average collection period? | ||
| b. What is the firm's current receivables balance? | ||
| c. What would be the firm's new receivables balance if Milwaukee Surgical toughened up on its | ||
| collection policy, with the result that all nondiscount customers paid on the 30th day? | ||
| d. Suppose that the firm's cost of carrying receivables was 8 percent annually. How much would the | ||
| toughened credit policy save the firm in annual receivables carrying expense? (Assume that the entire | ||
| amount of the receivables had to be financed.) | ||
| ANSWER |
Problem 6
| UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT | ||
| Chapter 15 -- Working Capital Management | ||
| PROBLEM 6 | ||
| Fargo Memorial Hospital has annual net patient service revenues of $14.4 million. The hospital's patient | ||
| accounts manager estimates that 10 percent of third party payers pay on Day 30, 60 percent pay on Day 60, | ||
| and 30 percent pay on Day 90. | ||
| a. What is Fargo's average collection period? (Assume 360 days per year throughout this problem.) | ||
| b. What is the firm's current receivables balance? | ||
| c. What would be the firm's new receivables balance if a newly proposed electronic claims system resulted | ||
| in collecting from third-party payers in 45 and 75 days, instead of in 60 and 90 days? | ||
| d. Suppose the firm's annual cost of carrying receivables was 10 percent. If the electronic claims system | ||
| costs $30,000 a year to lease and operate, should it be adopted? (Assume that the entire receivables | ||
| balance has to be financed.) | ||
| ANSWER |
Problem 7
| UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT | ||
| Chapter 15 -- Working Capital Management | ||
| PROBLEM 7 | ||
| Jones Surgicenter uses 90,000 bags of IV solution annually. The optimal safety stock (which is on hand | ||
| initially) is 1,000 bags. Each bag costs the center $1.50, inventory carrying costs are 20 percent, and | ||
| the cost of placing an order with its supplier is $15. | ||
| a. What is the economic order quantity? | ||
| b. What is the maximum inventory of IV solution bags? | ||
| c. What is the center's average inventory of IV solution bags? | ||
| d. How often must the center order (in days)? | ||
| ANSWER |
