Problem: The board chair has asked management to develop some strategies to improve profitability and estimate the impact of the strategies on the hospital's return on equity (ROE). By how much would the 2021 ROE change from each of these strategies? (Hint: The case model cannot be used to answer these questions.)
a. Vacant land is sold at a loss and total assets decrease by $2.0 million. Net income would not be affected, and the board wants to maintain the 2021 debt ratio.
b. Debt is substituted for equity, and the debt ratio falls to 48 percent. Total assets would not be affected. Interest expense would decrease, but inflation would offset the lower interest expense, and thus net income would not change.
c. LEAN management is implemented, and total expenses decrease by $0.5 million. Total revenue. total assets, and total liabilities and net assets would not change.
d. Whatever strategy Melissa chooses, she is under pressure from the board to increase ROE to at least 14 percent.
What total margin would be needed to achieve the 14 percent ROE, holding everything else constant?