End of Chapter Questions

End of Chapter Questions

13.1 a. What is the primary difference between financial statement analysis an operational analysis?

• Financial statement analysis involves using financial statement data to make judgements about a business’s financial conditions.
• Operational analysis is concerned with improving the operational efficiency of the business.

1. Why are both types of analysis useful to healthcare managers and investors?

• Both financial statement analysis and operational analysis are useful to healthcare managers because both industries depend upon various reports to conduct business and attract customers.

13.2 Should financial statement analysis be conducted only on historical data? Explain your answer.

• There are disadvantages and advantages of financial statement analysis. One advantage is that it can provide helpful insights such as if the business has been profitable. It can determine what the cash flow is and how much capital has been invested into the business. The disadvantage would be is that it won’t necessarily provide insights into the future operations or profitability of the business.

13.3 One is asset management ratio, the inventory turnover ratio, is defined as revenues divided by inventories. Would this ratio be more important for a medical device manufacturer or a hospital management company?

• A medical device manufacturer has a greater use for the inventory turnover ratio than a hospital management company because hospitals don’t have excess to stock like an equipment as a manufacturer would. Healthcare organizations are more interested in the medical services that they provide and less of the stock equipment.

13.4 a. Assume that all Gatorland and Badger manner, two operations of nursing homes have fiscal years that end at different times- one in June and one in December. Would this fact cause any problems when comparing ratios between the two businesses?

• Yes, the different fiscal year ending times causes problems because the time distorts the comparison ratios. If in June the profits influx it may not be consistent with the data in December due to a different consolidation.

1. Assume that two companies that operate walk-in clinics both have the same December year end, but one is based in Aspen in (a winter resort town), while the other operates on Nantucket island (a summer destination). Would this difference in location lead to problems in a comparative analysis?

• Yes, because both companies follow the same accounting period, but have different locations. This will cause issues with the comparative analysis.

13.6 a. What is the difference between trend analysis and comparative analysis?

• Trend analysis observes whether a company’s financial situation is improving, deteriorating, or holding constant over a period
• Comparative analysis gives information about company’s financial situation compared to other companies within the same industry or industry averages.

1. Which is more important?

For an accurate picture, the use of both the comparative and trend analysis is essential.

13.7 Assume that a large group practice has a low return on equity. How could DuPont

analysis be used to identify possible actions to help boost profitability?

The Du Pont analysis gives insight for increasing profitability by controlling expenses, increasing utilization of assets, or increasing equity multipliers.

End of Chapter Problems 13.1-13.6

13.1 General Hospital has a current ratio of 0.5. Which of the following actions would improve (increase) this ratio? (Hint: create a simple balance sheet that has a current ratio of 0.5. Then, judge how the following transactions would affect the balance sheet.)

• 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 ( book value).

Answer:

1. Will not increase the current ratio
2. Will not improve the current ratio
3. Will reduce the current ratio
4. Will not improve the current ratio
5. Will not improve the current ratio

1. Now assume that General Hospital has a current ratio of 1.2. in this situation, which of the listed actions would improve this ratio?

• The plans above will improve the ratio

13.2 Southwest Physicians, a medical group practice in Oklahoma City, is just being

formed. It will need $2 millions of total assets to generate $3 million in revenues.

Furthermore, the group expects to have a total margin of 5 percent. The group

is considering two financing alternatives. First, it can use all-equity financing by

requiring each physician to contribute her pro rata share. Second, 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 total margin, what is the difference

between the expected return on equity (ROE) if the group finances with 50 percent

debt versus the expected ROE if it finances entirely with equity capital?

• ROE= Profit margin * Total asset turnover * Equity multiplier

Profit Margin = 5%

Total asset turnover ratio = $3,000,000 / $2,000,000 = 1.5 times

• Equity multiplier = 2,000,000 / 2,000,000 = 1 ( there is no debt)

• ROE = 0.05 * 1.5 * 1 = 7.5% ( This is the ROE when the firm uses all equity)

• Calculating the ROE when the firm uses 50% of debt.

• Equity multiplier = 1 + (Debt-equity ratio)

= 1+ (Total debt/ Total equity)

= 1 + (0.50 / $0.5)

= 1 + 1

= 2

• Debt remaining is ( 1 – 0.50) = $0.50 om equity
• ROE = 0.05 * 1.5 * 2 = 15%
• The ROE is 15% when the firm uses %50 debt in its capital structure

13.3 Park Ridge Homecare’s financial statements are presented in exhibit 13.113 point 2 and 13.3. In the chapter, we calculate selected ratios for 2016.

2015. Calculate the business’s financial ratios for 2015. Assume that Park Ridge had $18,000 in lease payments in 2015. (Use the ratio analysis discussion to identify the application ratios).
2016. Interpret the ratios. For the analysis, assume that this sector average data presented in the ratio analysis section are valid for 2015

13.4 Consider the following financial statements for BestCare, a not-for-profit health insurer.

1. Perform a DuPont analysis on BestCare period assume that the sector average ratios are as follows:

• Total margin: (1,218 / 28,613) = 4.2%
• Total asset turnover: (28,613 / 98,069) = 2.89
• Equity multiplier: (9869 / 2118) = 4.85
• Return on equity: 2% * 2.89% * 4.85 = .575

1. Calculate and interpret the following ratios for BestCare.

• Return on asset: 1218 / 9869 = 12.3%
• Current ratio: 3947 / 3456 = 1.14
• DCOH: 2737 / (27395 / 365) = 36.46
• Debt-to-equity ratio: 4295 / 2118 = 2.03
• Times interest earned ratio: 2118 / 385 = 5.5
• Fixed-asset turnover ratio: 28613 / 5924 = 4.83

13.5 Consider the following financial statements for Green Valley Nursing Home Inc., a for-profit, long term care facility.

1. Perform a DuPont analysis on Green Valley. Assume that the sector average ratios are as follows:

1. Calculate and interpret the following ratios:

• ROA: 2.3%
• Current ratio: 1.37
• Days cash on hand: 13
• Average collection period: 25
• Debt ratio: 86%
• Debt-to-equity ratio: 6.0
• Times interest earned: 1.43
• Fixed asset turnover: 1.73

13.6 Examine the sector average ratios given in problems 13.4 and 13.5.Explain why the ratios are different between the health insurance in nursing home sectors.

• The managed care facilities have a high total margin ratio compared to nursing homes. The difference is the higher revenue and lower expenses of managed care.