What is the firms price ratio and what is its market ratio

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Reference no: EM13844061

Problem: 1-

Consider the following financial statements for Best Care HMO, a not-for-profit managed care plan:

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

Best Care HMO Balance Sheet June 30, 2011 (in thousands)

 

Assets

 

Cash and cash equivalents $2737
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 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%

b. Calculate and interpret the following ratios for BestCare:

 

Industy Average

Return on assets (ROA) 8.0%
Current ratio 1.3
Days cash on hand 41 days
Average collection period Debt ratio 7 days
Debt Ratio 69%
Debt-to-equity ratio 2.2
Times interest earned (TIE) ratio 2.8
Fixed asset turnover ratio 5.2

Problem: 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

Revenue:

 

Net patient service revenue

$ 3,163,258

Other revenue

106,146

Total revenues

$3,269,404

Expenses:

 

Salaries and benefits

$ 1,515,438

Medical supplies and drugs

966,781

Insurance In         and other

296,357

Provision for bad debts

110,000

Depredation

85,000

Interest

206,780

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

Green Valley Nursing Home, Inc.
Balance Sheet
December 31, 2011

Assets

 
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 Shareholders' Equity  
 Current Liabilities:  
 Accounts payable  $ 72,250
 Accrued expenses  192,900
 Notes payable 100,000
 Current portion of long-term debt  80,000
 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. 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.

• What is the firm's price/earnings ratio?

• What is its market/book ratio?

17.6 Examine the industry average ratios given in problems 1 and 2. Explain why the ratios are different between the managed care and nursing home industries.

Reference no: EM13844061

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