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

Best Care HMO

Statement of Operations and Change in Net Assets

Year Ended June 30, 2007

(In thousands)

Revenue:

Premiums earned ...........................................................$26,682

Coinsurance .....................................................................$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

Year Ended June 30, 2007

(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 Best Care. 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 Best Care:

Industry average

Return on assets (ROA) ..........................................8.0%

Current ratio ..............................................................1.3

Days cash on hand .............................................41 days

Average collection period ....................................7 days

Debt ratio ................................................................69%

Debt-to-equity ratio ..................................................2.2

Times interest earned (TIE) ratio ..............................2.8

Fixed asset turnover ratio ..........................................5.2