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, 2XXX
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 and other				$296,357
Rent				$110,000
Depreciation				$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
			Year Ended December 31, 2XXX
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?