Assume that there are 10000 shares of green valleys stock

Question

Problem: 1-

Consider the following financial statements for Best Care HMO, a not-for-profit managed care plan:

Statement of Operations and Change in Net Assets
Year Ended June 30, 2011
(in thousands)

Revenue:
Premiums earned	$26,682
Co-insurance	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

Best Care HMO Balance Sheet June 30, 2011 (in thousands)

 

Assets
Cash and cash equivalents	$2737
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 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:

	Industy Average
Return on assets (ROA)	8.0%
Current ratio	1.3
Days cash on hand	41 days
Average collection period Debt ratio	7 days
Debt Ratio	69%
Debt-to-equity ratio	2.2
Times interest earned (TIE) ratio	2.8
Fixed asset turnover ratio	5.2

Problem: 2-

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, 2011

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 In         and other	296,357
Provision for bad debts	110,000
Depredation	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
December 31, 2011

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	71%
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?

17.6 Examine the industry average ratios given in problems 1 and 2. Explain why the ratios are different between the managed care and nursing home industries.