Reference no: EM132609041
Question 1: The board chair has asked management to develop some strategies to improve profitability and estimate the impact of the strategies on the hospital's ROE. By how much would the 2017 ROE change from each of these strategies?
a. Vacant land is sold, and total assets decrease by $2.0 million. Net income would not be affected, and the board wants to maintain the 2017 debt ratio.
b. Debt is substituted for equity, and the debt ratio increases to 48 percent. Total assets would not be affected. Interest expense would increase but better cost controls would offset the higher 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 10 percent. What total margin would be needed to achieve the 10% ROE, holding everything else constant?