RIVER COMMUNITY HOSPITAL CASE 1

Cases in HELATHCARE FINANCE, FIFTH EDITION, LOUIS C. GAPENSKI

The board chair has asked management to develop some strategies to improve profitability and estimate the impact on the strategies on the hospitals ROE. By how much would the 2013 ROE change from each of these strategies

A. Vacant land is sold and total assets decrease by $2million. Net income would not be affected and the board wants to maintain the 2013 debt ratio. B. Debt is subsistuted for equity and the debt ratio increases to 48%. 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 $.5million. Total revenue, total assets, and total liabilities & net assets would not change. D. Whatever strategy Melissa chooses, she is under pressure by the board to increase return on equity to at least 10%. What total margin would be needed to achieve the 10% ROE, holding everything else constant?