1 ) Consider the following financial statement for BestCare HMO, a non-for-profit managed care plan:
Best HMO
Statement of Operations and Change in Net Assets
Year ended June 30, 2011
(in thousands)
Revenue:
Premium earned $26,682
Co-Insurance 1,689
Interest and other income 242
Total revenue $28,613
Expenses:
Salaries $15,154
Medical supplies and drugs 7,507
Insurance 3,963
Provision for bad drugs 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
BestCare HMO
Balance Sheet
June 30, 2011
(in thousands)
Assets
Cash and cash equivalents $ 2,737
Net premium 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 $ 3,456
Long-term debt $ 4,295
Total liabilities $ 7,751
Net assets (equity) $ 2,118
Total liabilities and net assets $ 9,869
Questions:
A.) Perform a Du point 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:
Industry Average
Return on assets (ROA) 8.0%
Current ratio 1.3
Days cash on hand 41 days
Average collection period 7 days
Debt ratio 69%
Debt-to-equity ratio 2.2
Times interest earned (TIE) ratio 2.8
Fixed asset turnover ratio 5.2
2) Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can lease the equipment. Assume that the following facts apply to the decision:
• The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15, and 0.07 in years 1 through 4, respectively.
• Estimated maintenance expenses are %75,000 payable at the beginning of each year whether the MRI is leased or purchased.
• Bid Sky's marginal tax rate is 40 percent.
• The banl loan would have an interest rate of 15 percent.
• If leased, the lease (rental) payments would be $400,000 payable at the end of each of the next four years.
• The estimated residual (and salvage) value is $250,000.
Questions:
A.) What are the NAL and IRR of the lease? Interpret each value.
B.) Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What is the new NAL? The new IRR?