PROBLEM:
Gainesville Surgicenter Inc. is a large, ambulatory surgery center owned by a group practice of surgeons in Gainesville, Florida. The 2006 financial statements for the firm are shown below:
| Balance Sheet as of December 31, 2006 (Thousands of dollars) |
|
|
| Cash |
|
$1,800 |
|
Accounts payable |
$7,200 |
| Receivables |
$10,800 |
|
Notes payable |
$3,472 |
| Inventories |
$12,600 |
|
Accruals |
|
$2,520 |
| Total current assets |
$25,200 |
|
Total current liabilities |
$13,192 |
| Net fixed assets |
$21,600 |
|
Mortgage bonds |
$5,000 |
|
|
|
|
Common stock |
$2,000 |
|
|
|
|
Retained earnings |
$26,608 |
| Total assets |
$46,800 |
|
Total liabilities & equity |
$46,800 |
| Income Statement for 2006 (Thousands of dollars) |
| Revenues |
|
|
$36,000 |
| Operating costs |
|
$30,783 |
| Earnings before interest and taxes |
$5,217 |
| Interest |
|
|
$1,017 |
| Earnings before taxes |
|
$4,200 |
| Taxes (40%) |
|
$1,680 |
| Net income |
|
$2,520 |
| Dividends (60%) |
|
$1,512 |
| Addition to retained earnings |
|
$1,008 |
a. Assume that the company was operating at full capacity in 2006 with regard to all items except fixed assets (operating rooms and support space); fixed assets in 2006 were utilized to only 75 percent of capacity. By what percentage could 2007 revenues increase over 2006 revenues without the need for an increase in fixed assets?
b. Now suppose 2007 revenues increase by 25 percent over 2006 revenues. Use the constant growth method to develop a pro forma balance sheet and income statement as in Table. Assume that Gainesville cannot sell any fixed assets and that any financing required is borrowed as notes payable at an interest rate of 12 percent.
ANSWER:
a. 75% of Fixed Assets $16,200
Fixed Asset Turnover Ratio 2.2
Increase in Sales Revenue $360
b. 75% of Fixed Assets $0
Fixed Asset Turnover Ratio 0.1
Increase in Sales Revenue $360