Chapter 13 End of Chapter Problems

13.1 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 the following transactions would affect the balance sheet.)

Use cash to pay off current liabilities.

Collect some of the current accounts receivable.

Use cash to pay off some long-term debt.

Purchase additional inventory on credit (i.e., accounts payable).

Sell some of the existing inventory at cost (book value).

b. Now assume that General Hospital has a current ratio of 1.2. In this situation, which of the listed actions would improve this ratio? 13.2 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 have a total margin of 5 percent. The group is considering two financing alternatives. First, it can use all-equity financing by requiring each physician to contribute her pro rata share. Second, the practice can finance up to 50 percent of its assets with a bank loan. Assuming that the debt alternative has no impact on the expected total margin, what is the difference between the expected return on equity (ROE) if the group finances with 50 percent debt versus the expected ROE if it finances entirely with equity capital?

13.3 Park Ridge Homecares financial statements are presented in exhibits 13.1, 13.2, and 13.3. In the chapter, we calculate selected ratios for 2016. a. Calculate the businesss financial ratios for 2015. Assume that Park Ridge had $18,000 in lease payments in 2015. (Use the ratio analysis discussion to identify the applicable ratios.) b. Interpret the ratios. For the analysis, assume that the sector average data presented in the ratio analysis section are valid for 2015.

13.4 Consider the following financial statements for BestCare, a not-for-profit health insurer.

a. Perform a DuPont analysis on BestCare. Assume that the sector average ratios are as follows: Total margin 3.8% Total asset turnover 2.1 Equity multiplier 3.2 Return on equity 25.5%

b. Calculate and interpret the following ratios for BestCare

13.5 Consider the following financial statements for Green Valley Nursing Home Inc., a for-profit, long-term care facility.

a. Perform a DuPont analysis on Green Valley. Assume that the sector average ratios are as follows: Total margin 3.5% Total asset turnover 1.5 Equity multiplier 2.5 Return on equity 13.1%

b. Calculate and interpret the following ratios:

13.6 Examine the sector average ratios given in problems 13.4 and 13.5. Explain why the ratios are different between the health insurance and nursing home sectors.

BestCare Health Insurer Statement of Operations, Year Ended June 30, 2016 (in Thousands) BestCare Health Insurer Statement of Operations, Year Ended June 30, 2016 (in Thousands)