16.1. On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those checks to clear. Each day the clinic typically receives $1,000 in checks that take 3 days to clear. What is the clinic’s average net float?
16.2. Drug’s R Us operates a mail-order pharmaceutical business on the West Coast. The firm receives an average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment from the time customers mail their checks to the time the firm receives and processes them. A lockbox system that consists of 10 local depository banks and a concentration bank in San Francisco would cost $6,500 per month. Under this system, customers’ checks would be received at the lockbox locations one day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75 each. Assume that the firm could earn 10% on marketable securities and that there are 260 working days and hence 260 transfers from each lockbox location per year.
a. What is the total annual cost of operating the lockbox location per year?
b. What is the dollar benefit of the systems to Drugs ‘R Us?
c. Should the firm initiate the lockbox system?
16.4. Langley Clinics Inc. buys 4400,000 in medical supplies each year (at gross prices) from its major supplier Consolidated Services which offers Langley terms of 2.5/10 net 45. Currently, Langley is paying the supplier the full amount due on Day 45 but it is considering taking the discount paying on Day 10 and replacing the trade credit with a bank loan that has a 10% annual cost.
a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume 360 days per year throughout this problem.)
b. What is the amount of costly trade credit?
c. What is the approximate annual cost of the costly trade credits?
d. Should Langley replace its trade credit with the bank loan? Explain your answer.
16.5. Milwaukee Surgical Supplies Inc. sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000 and the collections department estimates that 30% of the customers pay on the tenth day and take discounts, 40% pay on the thirtieth day and the remaining 30% pay on average 40 days after the purchase. (Assume 360 days per year.)
a. What is the firm’s average collection period?
b. What is the firm’s current receivables balance?
c. What would be the firm’s new receivables balance if Milwaukee Surgical toughened up on its collection policy with the result that all non-discount customers paid on the 30th day?
d. Suppose that the firm’s cost of carrying receivables was 8% annually. How much would the toughened credit policy save the firm in annual receivables carrying expense?
17.1. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e. increase) this ratio?
a. Use cash to pay off current liabilities?
b. Collect some of the current accounts receivable?
c. Use cash to pay off some long term debt?
d. Purchase additional inventory on credit (i.e. accounts payable)?
e. Sell some of the existing inventory at cost?
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: $25,682
Premiums earned $1,689
Interest and other income $ 242
Total revenue $28,613
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)
Current Assets:
Cash and 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:
Total margins 3.8%
Total asset turnover 2.1%
Equity and multiplier 3.2%
Return on equity (ROE) 25.5%
b. Calculate and interpret the following ratios for BestCare:
c. Return on assets (ROA) 8.0%
d. Current ratio 1.3%
e. Days cash on hand 41 days
f. Average collection period 7 days
g. Debt ratio 69%
h. Debt-to-equity ratio 2.2%
i. Times interest earned (TIE) ratio 2.8%
j. Fixed asset turnover ratio 5.2%

Consider the following financial statements for Green Valley Nursing Home Inc. a for-profit, long-term care facility:
Green Valley Nursing Home Inc.
Statement of Income and Retained Earnings
Year Ended December 31, 2011
Net patient service revenue $3,163,258
Other revenue $ 106,146
Total revenues $3,269,404
Salaries and benefits $1,515,438
Medical supplies and drugs $ 966,781
Insurance and other $ 296,357
Provision for bad debt $ 110,000
Depreciation $ 85,000
Interest $ 206,000
Total expenses $ 3,180,356
Operating Income $ 89,048
Provision for income taxes $ 31,167
Net Income $ 57,881
Retained earnings, beginning of year $ 199,961
Retained earnings, end of year $ 257,842

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Green Valley Nursing Home Inc.
Balance Sheet
December 31, 2011
Current Assets:
Cash $105,737
Marketable securities $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 Shareholder’s Equity
Current liabilities:
Accounts payable $ 72,250
Accrued expenses $ 192,900
Notes payable $ 100,000
Current portion of long-term debt $ 80,000
Shareholder’s Equity:
Common stock $10 par value $100,000
Retained earnings $257,842
Total shareholder’s equity $357,842
Total liabilities and shareholder’s equity $2,502,992
a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows:

Total margin 3.5%
Total asset turnover 1.5%
Equity multiplier 2.5%
Return on equity (ROE) 13.1%

b. Calculate and interpret the following ratios:

Industry average
Return on assets (ROA) 5.2%
Current ratio 2.0%
Days cash on hand 22 days
Average collection period 19 days
Debt ratio 71%
Debt-to-equity ratio 2.5%
Times interest earned (TIE) ratio 2.6
Fixed asset turnover ratio 1.4
c. Assume that there are 10,000 shares of Green Valley’s stock outstanding and that some recently sold for $45 per share:
1. What is the firm’s price/earnings ratio?
2. What is its market/book ratio?
18.1. Suncoast Healthcare is planning to acquire a new X-ray machine that costs $200,000. The business can either lease the machine using an operating lease or buy it using a loan from a local bank. Suncoast’s balance sheet prior to acquiring the machine is as follows:
Current assets $100,000 Debt $400,000
Net fixed assets $900,000 Equity $600,000
Total assets $1,000,000 Total claims $1,000,000
a. What is Suncoast’s current debt ratio?
b. What would the new debt ratio be if the machine were leased?
c. What would the debt ratio be if the machine were purchased?
d. Is the financial risk of the business different under the two acquisition alternatives?
18.2. 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 ally 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 475,000 payable at the beginning of each year whether the MRI is leased or purchased.
• Big Sky’s marginal tax rate is 40%
• The bank loan would have an interest rate of 15%
• If leased, the lease 9rental) payments would be $00,000 payable at the end of each of the next four years.
• The estimated residual (and salvage) value is $250,000
1. What are the NAL and IRR of the lease, INTERPRET EACH VALUE
2. Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What are the new NAL and the new IRR?
18.3. HealthPlan Northwest must install a new $1 million computer to track patient records in its three service areas. It plans to use the computer for only three years at which time a brand new system will be acquired that will handle both billing and patient records. The company can obtain a 10% bank loan to buy the computer or it can lease the computer for three years. Assume that the following facts apply to the decision:
• The computer 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.
• The company’s marginal tax rate is 34%
• Tentative lease terms call for payments of $320,000 at the end of each year.
• The best estimate for the value of the computer after three years of wear and tear is $200,000
1. What are the NAL and IRR of the lease? INTERPRET EACH VALUE
2. Assume now that the bank loan would cost 15% but all other facrts remain the same. What is the new NAL?
3. What is the new IRR?
18.4. Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profit and loss statements and equity reinvestment (asset) requirements are as follows in millions:
2012 2013 2014 2015 2016
Net revenues $225.0 $240.0 $250.0 $260.0 $275.0
Cash expenses $200.0 $205.0 $210.0 $215.0 $225.0
Depreciation $11.0 $12.0 $13.0 $14.0 $15.0
Earnings before interest
And taxes (EBIT) $ 14.0 $23.0 $27.0 $31.0 $35.0 Interest $8.0 $9.0 $9.0 $10.0 $10.0
Earnings before taxes
(EBT) $6.0 $14.0 $18.0 $21.0 $25.0
Taxes (40%) $ 2.4 $ 5.6 25.0 $ 8.4 $10.0
Net profit $3.6 $8.4 $10.8 $12.6 $15.0
Asset requirement $6.0 $6.0 $6.0 $6.0 $6.0
Briarwood’s cost of equity is 16%. The best estimate for Briarwood’s long term growth rate is 4%.
1. What is the equity value of the hospital?
2. Suppose that the expected long-ter growth rate was 6%. What impact would this change have on the equity value of the business?
3. What impact would a growth rate of 2% have on the business?


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