1. 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.
The actions that would improve this ratio is to purchase additional inventory on credit.
b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio?
The actions that would improve this ratio is to use cash to pay off current liabilities.
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?
Operating Margin= Operating income/Net operating revenues
5%= x/3,000,000
.05 x 3,000,000 = 150,000
Return on Equity = net income/total equity
ROE = 150,000 / 2,000,000
ROE = 0.075 = 7.5%
ROE = 150,000 / 1,000,000
ROE = 0.15 = 15%
3. Riverside Memorial's primary finanical statements are presented in exhibits 1, 2, and 3.
a. Calcualte Riverside's financial ratios for 2014. Assume that Riverside has $1,000,000 in lease payments and $1,400,000 in debt principal repayments in 2014.
b. Interpret the comparative analysis, assume that the industry average data presented in thebook are valid for both 2014 and 2015.