Questions and Answers of Foundations of Finance

Consider the following 2008 data for Newark General Hospital (in millions of dollars):a. Calculate and interpret the two profit variances.b. Calculate and interpret the two revenue variances.c.
Briefly define the following cash flow estimation concepts:a. Incremental cash flowb. Sunk costc. Opportunity costd. Strategic valuee. Inflation effects
What is meant by the term capital rationing? From a purely financial standpoint, what is the best capital budget under capital rationing?
Santa Roberta Clinic has estimated its corporate cost of capital to be 11 percent.What are reasonable values for the project costs of capital for lower-risk, averagerisk, and higher-risk projects?
Great Lakes Clinic has been asked to provide exclusive healthcare services for next year’s World Exposition. Although flattered by the request, the clinic’s managers want to conduct a financial
California Imaging Center, a not-for-profit business, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated
You have been asked to evaluate the proposed acquisition of a new clinical laboratory test system. The system’s price is $50,000, and it will cost another $10,000 for transportation and
The staff of Jefferson Medical Services has estimated the following net cash flows for a food services operation that it may open in its outpatient clinic:The Year 0 cash flow is the net investment
(This optional problem requires statistics know-how.) Heywood Home Healthcare is evaluating a project with the following net cash flows and probabilities:The Year 5 values include salvage value.
The managers of United Medtronics are evaluating the following four projects for the coming budget period. The firm’s corporate cost of capital is 14 percent.a.What is the firm’s capital
a.What is a stakeholder?b. What stakeholders are most interested in the financial condition of a healthcare business?
a. What is the difference between gross revenues and net revenues? (Hint: Think about discounts and charity care.)b.What is the difference between patient service revenue and other operating
Entries for theWarren Clinic 2008 income statement are listed below in alphabetical order. Reorder the data in the proper format. Bad debt expense Depreciation expense General/administrative expenses
Consider the following income statement:a. How does this income statement differ from the one presented in Table 11.1?b. Did BestCare spend $367,000 on new fixed assets during fiscal year 2008? If
Consider this income statement:a. How does this income statement differ from the ones presented in Table 11.1 and Problem 11.2?b. Why does Green Valley show a provision for income taxes while the
Great Forks Hospital reported net income for 2008 of $2.4 million on total revenues of $30 million. Depreciation expense totaled $1 million.a. What were total expenses for 2008?b. What were total
Brandywine Clinic, a not-for-profit business, had revenues of $12 million in 2008. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $1.5 million. All
Assume that Mainline Healthcare, a for-profit corporation, had exactly the same situation as reported in Problem 11.5. However, Mainline must pay taxes at a rate of 40 percent of pretax income.
a.What is the difference in timing between the income statement and the balance sheet?b. What is wrong with this statement: “The clinic’s cash balance for 2008 was$150,000, while its net income
a.What makes an asset a current asset?b. Provide some examples of current assets.
a. On the balance sheet, what is the difference between long-term investments and property and equipment?b. What is the difference between gross fixed assets (gross plant and equipment)and net fixed
a.What is the difference between liabilities and equity?b.What makes a liability a current liability?c. Give some examples of current liabilities.d.What is the difference between notes payable and
a.What is the statement of cash flows, and howdoes it differ fromthe income statement?b.What are the three major sections of the statement of cash flows?c.What is the most important line on the
Middleton Clinic had total assets of $500,000 and an equity balance of $350,000 at the end of 2007. One year later, at the end of 2008, the clinic had $575,000 in assets and $380,000 in equity.What
San Mateo Healthcare had an equity balance of $1.38 million at the beginning of the year. At the end of the year, its equity balance was $1.98 million. Assume that San Mateo is a not-for-profit
Here is financial statement information on four not-for-profit clinics: December 31, 2007: Assets Liabilities Equity Pittman Rose Beckman Jaffe $ 80,000 $100,000 g $ 150,000 50,000 d $75,000 j a
The following are selected entries forWarren Clinic for December 31, 2008, in alphabetical order. CreateWarren Clinic’s balance sheet. Accounts payable Accounts receivable, net Cash $ 20,000 60,000
Consider the following balance sheet:a. How does this balance sheet differ from the one presented in Table 12.1 for Park Ridge Homecare?b. What is BestCare’s debt ratio? How does it compare with
Consider this balance sheet:a. How does this balance sheet differ from the ones presented in Table 12.1 and Problem 12.5?b. What is Green Valley’s debt ratio? How does it compare with the debt
What type of financial condition information is provided in the statement of cash flows?
Does the fact that its cash position has improved provide much insight into the business’s financial condition?
What did Park Ridge’s 2008 statement of cash flows tell us?
How can comparative and trend analyses be used to help interpret a ratio?
What role does asset and debt utilization play in a business’s profitability asmeasured by return on equity?
Briefly describe some of the problems encountered when performing financial statement analyses.
a.What is the primary difference between financial statement analysis and operational analysis?b.Why are both types of analyses useful to healthcare managers and investors?
One asset management ratio, the inventory turnover ratio, is defined as revenues divided by inventories.Would this ratio be more important for a medical device manufacturer or a hospital management
a. Assume that Old Gatorland and BadgerManor, two operators of nursing homes, have fiscal years that end at different times—say, one in June and one in December.Would this fact cause any problems
a.What is the difference between trend analysis and comparative analysis?b.Which one is more important?
Assume that a large group practice has a low return on equity (ROE). How could Du Pont analysis be used to identify possible actions to help boost profitability?
a. General Hospital has a current ratio of 0.5.Which of the following actions would improve(increase) this ratio? (Hint: Create a simple balance sheet that has a current ratio of 0.5. Then, judge how
Southwest Physicians, a medical group practice in Oklahoma City, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to
Park Ridge Homecare’s financial statements are presented in Tables 13.1, 13.2, and 13.3. In the chapter, we calculated selected ratios for 2008.a. Calculate the business’s financial ratios for
Consider the following financial statements for BestCare HMO, a not-for-profitmanaged care plan:a. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows:b.
Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long-term care facility:a. Perform a Du Pont analysis on Green Valley. Assume that the industry average
Examine the industry average ratios given in Problems 13.4 and 13.5 above. Explain why the ratios are different between the managed care and nursing home industries.
Briefly describe the planning process. In your description, include summaries of strategic, operating, and financial plans.
How are the revenue, expense, and operating budgets related?
a. What are the advantages and disadvantages of conventional budgeting and zerobased budgeting?b. What organizational characteristics create likely candidates for zero-based budgeting?
If you were the CEO of Bayside Memorial Hospital, would you advocate a top-down or bottom-up approach to budgeting? Explain your rationale.
Explain the relationship between a simple budget and a flexible budget.
Here are the budgets of Brandon Surgery Center for the most recent historical quarter, in thousands of dollars:The center assumes that all revenues and costs are variable and hence tied directly to
Refer to Carroll Clinic’s 2008 operating budget contained in Table 6.2. Instead of the actual results reported in Table 6.3, assume the results reported below:Carroll Clinic: New 2008 Resultsa.
Again refer to Carroll Clinic’s 2008 operating budget contained in Table 6.2. Instead of the actual results reported in Table 6.3 or listed in Problem 6.3, assume these results:Carroll Clinic: New
What is the revenue cycle?Why is it so important to healthcare organizations?
a. Give two reasons that businesses hold marketable securities.b. Which types of securities are most suitable for holding as marketable securities?c. Suppose Southwest Regional Medical Center has
What are key performance indicators (KPIs)?What is a dashboard, and how is it used?
On a typical day, Park Place Clinic writes $1,000 in checks. Generally, those checks take four days to clear. Each day the clinic typically receives $1,000 in checks, which take three days to
Drugs ‘R Us operates a mail-order pharmaceutical business in San Francisco. The firm receives an average of $325,000 in payments per day. On average, it takes four days from the time customers mail
Fargo Memorial Hospital has annual patient service revenues of $14,400,000. It has two major third-party payers, and some of its patients are self-payers. The hospital’s patient accounts manager
Milwaukee Surgical Supplies, Inc. sells on terms of 3/10, net 30. That means customers that pay in ten days get a 3 percent discount on their purchases, while customers that do not take the discount
Sacred Heart Hospital has the following receivables amounts, listed by age:a. Complete the aging schedule by filling in the Percentage of Total Value column.b. Interpret your results.c. Using these
Sacramento Memorial Hospital has the following financial data and operational metrics:a.What is the hospital’s profit per discharge?b. What is the hospital’s total inpatient and total outpatient
Northeast Medical Group, a family practice, has the following financial data and operational metrics:a. What is the group’s revenue per physician?b. What is the group’s operating cost per
The two primary factors that affect interest rates on debt securities are risk and inflation.Explain the role of each of these factors.
Discuss some factors that healthcare managers must consider when setting a firm’s target capital structure.
Explain the calculation and interpretation of the corporate cost of capital.
Seattle Health Plans currently uses zero debt financing. Its operating profit is $1 million, and it pays taxes at a 40 percent rate. It has $5 million in assets and, because it is all-equity
Calculate the effective (after-tax) cost of debt forWallace Clinic, a for-profit healthcare provider, assuming that the interest rate set on its debt is 11 percent and its tax rate isa. 0 percentb.
St. Vincent’s Hospital has a target capital structure of 35 percent debt and 65 percent equity. Its cost of equity estimate is 13.5 percent and its cost of tax-exempt debt estimate is 7
Richmond Clinic has obtained the following estimates for its costs of debt and equity at various capital structures:What is the firm’s optimal capital structure? Percent Debt 0% After-Tax Cost of
Morningside Nursing Home, a not-for-profit corporation, is estimating its corporate cost of capital. Its tax-exempt debt currently requires an interest rate of 6.2 percent and its target capital
a. What is capital investment analysis?Why are capital investment decisions so important to businesses?b. What is the purpose of placing capital investments into categories, such as mandatory
a.What is the opportunity cost of capital?b. How is this rate used in discounted cash flow (DCF) analysis?c. Is this rate a single number that is used in all situations?
Describe the following project breakeven and profitability measures. Be sure to include each measure’s economic interpretation.a. Paybackb. Net present value (NPV)c. Internal rate of return (IRR)
Find the following values for a single cash flow:a. The future value of $500 invested at 8 percent for one yearb. The future value of $500 invested at 8 percent for five yearsc. The present value of
Consider the following net cash flows:a. What is the net present value if the opportunity cost of capital (discount rate) is 10 percent?b. Add an outflow (or cost) of $1,000 at Year 0. Now, what is
Consider another set of net cash flows:a. What is the net present value of the stream if the opportunity cost of capital is 10 percent?b. What is the value of the stream at the end of Year 5 if the
Better Health, Inc., is evaluating two capital investments, each of which requires an up-front (Year 0) expenditure of $1.5 million. The projects are expected to produce the following net cash
Capital Healthplans, Inc. is evaluating two different methods for providing home health services to its members. Both methods involve contracting out for services, and the health outcomes and
Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capital investments—Project X and Project Y. Each project requires a net
The director of capital budgeting for Big Sky Health Systems, Inc., has estimated the following cash flows (in thousands of dollars) for a proposed new service:The project’s opportunity cost of
a.What is meant by the term healthcare finance as it is used in this book?b.What are the two broad areas of healthcare finance?c. Why is it necessary to have a book on healthcare finance as opposed
a. Briefly discuss the role of finance in the healthcare industry.b. Has this role increased or decreased in importance in recent years?
a. Briefly describe the following healthcare settings:• Hospitals• Ambulatory care• Home health care• Long-term care• Integrated delivery systems b.What are the benefits attributed to
What role does regulation play in the healthcare industry?
What is the structure of the finance function within healthcare organizations?
a. From a financial perspective, briefly describe the concept of a business.b.What is the difference between a business and a pure charity?
What are the primary organizational differences between investor-owned and not-forprofit corporations?
a.What is the primary goal of investor-owned corporations?b.What is the primary goal of most not-for-profit healthcare corporations?c. Are there substantial differences between the finance goals of
Assume that Provident Health System, a for-profit hospital, has $1 million in taxable income for 2008, and its tax rate is 30 percent.a. Given this information, what is the firm’s net income? (Net
A firmthat owns the stock of another corporation does not have to pay taxes on the entire amount of dividends received. In general, only 30 percent of the dividends received by one corporation
Kim Davis is in the 40 percent personal tax bracket. She is considering investing in HCA (taxable) bonds that carry a 12 percent interest rate.a.What is her after-tax yield (interest rate) on the
George and MargaretWealthy are in the 48 percent tax bracket, considering both federal and state personal taxes. Norman Briggs, the CEO of Community General Hospital, has been aggressively pursuing
a.What are the primary characteristics of managed care organizations (MCOs)?b. Describe two different types of MCOs.
What are the primary differences between direct and indirect (overhead) costs?
a.What is a cost pool?b.What is a cost driver?c. How is the cost allocation rate determined?
Effective cost drivers, and hence the resulting allocation system, must have what two important attributes?
Briefly describe (illustrate) the cost allocation process.
Which is the better cost driver for a hospital’s Financial Services Department—patient services department revenues or number of bills generated? Explain your rationale.

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