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?
2. Consider the following financial statements for Best Care HMO, a not-for-profit managed care plan: BestCare HMOStatement of Operations and Change in Net AssetsYear Ended June 30, 2004 (in thousands)Revenue:Premiums earned $26,682Co-insurance 1,689Interest and other income 242Total revenue $28,613Expenses:Salaries and benefits $15,154Medical supplies and drugs 7,507Insurance 3,963Provision for bad debts 19Depreciation 367Interest 385Total expenses $27,395Net income $ 1,218
Net assets, beginning of year $ 900Net assets, end of year $ 2,118BestCare HMOBalance SheetJune 30, 2004(in thousands)
AssetsCash and cash equivalents $ 2,737Net premiums receivable 821Supplies 387Total current assets $ 3,945Net property and equipment $ 5,924Total assets $ 9,869
Liabilities and Net AssetsAccounts payable medical services $ 2,145Accrued expenses 929Notes payable 141Current portion of long-term debt 241Total current liabilities $ 3,456Long-term debt $ 4,295Total liabilities $ 7,751Net 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 2.1Equity multiplier 3.2Return on equity (ROE) 25.5%b. Calculate and interpret the following ratios for BestCare:Industry AverageReturn on assets (ROA) 8.0%Current ratio 1.3Days cash on hand 41daysAverage collection period 7daysDebt ratio 69%Debt-to-equity ratio 2.2Times interest earned (TIE) ratio 2.8Fixed asset turnover ratio 5.2