Question 1. Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2011. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $1.5 million. All revenues were collected in cash during the year and all expenses other than depreciation were paid in cash.
a. Construct Brandywine's 2011 income statement.
b. What were Brandywine's net income, total profit margin, and cash flow?
c. Now, suppose the company changed its depreciation calculation procedures (still within GAAP) such that its depreciation expense doubled. How would this change affect Brandywine's net income, total profit margin, and cash flow?
d. Suppose the change had halved, rather than doubled, the firm's depreciation expense. Now, what would be the impact on net income, total profit margin, and cash flow?
Question 2. Consider the following balance sheet:
BestCare HMO
Balance Sheet
June 30, 2011
(in thousands)
Assets
Current Assets:
Cash $2,737
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 382
Total current liabilities $3,456
Long-term debt $4,295
Total liabilities $7,751
Net assets-unrestricted (equity) $2,118
Total liabilities and net assets $9,869
a. How does this balance sheet differ from the one presented in Exhibit 4.1 for Sunnyvale?
b. What is BestCare's net working capital for 2011?
c. What is BestCare's debt ratio? How does it compare with Sunnyvale's debt ratio?
Question 3.
Green Valley Nursing Home, Inc.
Balance Sheet
December 31, 2011
Assets
Current Assets:
Cash $ 105,737
Investments 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 180,000
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. How does this balance sheet differ from the ones presented in Exhibit 4.1 and Problem 4.5?
b. What is Green Valley's net working capital for 2011?
c. What is Green Valley's debt ratio? How does it compare with the debt ratios for Sunnyvale and BestCare?
Question 4:
Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:
BestCare HMO
Statement of Operations and Change in Net Assets
Year Ended June 30, 2011
(in thousands)
Revenue:
Premium earned $26, 286
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
Assets
Cash and Cash equivalent $2,737
Net premium received 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
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%
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%
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
(1218/28613)*(28613/9869)*(9869/2118) = .575
4.2% X 2.89 X 4.85
The facility is doing better than the industry average. This is driven basically by the equity multiplier and asset turnover, although all of the ratios are higher than the stated averages.
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 day
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
ROA = 1218/9869 = 12.3%
Current Ratio = 3947/3456 = 1.14
The organization is a little less liquid than its competitors, but not too much where the company should be concerned. However, the company should ensure that they don't generate too much more short term debts.
Days Cash on Hand = 2737/(27395/365) = 36.46
The organization has a little less cash on hand than its competitors. Cutting costs or increasing cash reserves would bring the company back in line with industry averages.
Debt to Equity = 4295/ 2118 = 2.03
This organization has a lot more debt than its competitors. This is very dangerous. The company needs to pay down some of their long term debt. They would be seen as risky to investors or a bank.
**only long term debt was considered.
For total liabilities/equity, it would be 7751/2118 or 3.66
TIE = 2118/385 = 5.5
The organization has strong earnings, or lower than average interest rates.
Fixed Asset TO = 28613/5924 = 4.83
This is close enough to the industrial average that there is no need to be concerned. However, the ratio tells us how well the company is using their fixed assets to generate revenue.