Finance
Problem 17.4
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:
Premiums earned $26,682
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
BestCare HMO
Balance Sheet
June 30, 2011
(in thousands)
Assets
Cash and cash equivalents $ 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 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:
a. Total margin 3.8%
b. Total asset turnover 2.1
c. Equity multiplier 3.2
d. Return on equity (ROE) 25.5%
Response:
Du Pont equitation:
ROE = Total margin × Total asset turnover × Equity multiplier
ROE – Return on equity
Net income/Total equity=Net income/Total revenue × Total revenue/Total assets × Total
assets/Total equity
a. Total Margin (Profit Margin) = Net Income/ Total Revenues
Total Margin = ?
b. Total Asset Turnover = Total revenues / Total assets
Total Asset Turnover = ?
c. ROE = ROA x Equity Multiplier
ROE = ?
d. Equity Multiplier = Total assets / Total Equity
Equity Multiplier = ?
Discuss your results:
II: Problem 17.4
B. Calculate and interpret the following ratios for BestCare:
Industry Average
a. Return on assets (ROA) 8.0%
b. Current ratio 1.3
c. Days cash on hand 41days
d. Average collection period 7days
e. Debt ratio 69%
f. Debt-to-equity ratio 2.2
g. Times interest earned (TIE) ratio 2.8
h. Fixed asset turnover ratio 5.2
Response:
a. Return on assets = Net Income / Total Assets
Return on assets = ?
b. Current Ratio = Current Assets /Current Liabilities
Current Ratio = ?
c. Days Cash on Hand = (Cash + Marketable Securities) / (Expenses – Depreciation – Provision of
uncollectible) / 365
Days Cash on Hand = ?
d. Average collection period = Net Patients Account Receivables / Net Patient Service Revenue/365
Average collection period = ?
e. Debt Ratio=Total Debt / Total Assets
Debt Ratio= ?
f. Debt-to-Equity ratio = Total Debt / Total Equity
Debt-to-Equity ratio = ?
g. Times interest earned (TIE) ratio = Earnings before interest and taxes (EBIT) / Interest expense
For nonprofit business EBIT = Net Income + Interest expense
TIE ratio = (Net Income + Interest expense)/ Interest expense
TIE ratio = ?
h. Fixed Asset Turnover Ratio = Total Revenues / Net Fixed Assets
Fixed Asset Turnover Ratio = ?
