Finance Homework

11.1 Entries for the Warren Clinic 2008 income statement are listed below in alphabetical

order. Reorder the data in the proper format.

Bad debt expense $ 40,000

Depreciation expense 90,000

General/administrative expenses 70,000

Interest expense 20,000

Interest income 40,000

Net income 30,000

Other revenue 10,000

Patient service revenue 440,000

Purchased clinic services 90,000

Salaries and benefits 150,000

Total revenues 490,000

Total expenses 460,000

11.2 Consider the following income statement:

BestCare HMO

Statement of Operations

Year Ended June 30, 2008

(in thousands)

Revenue:

Premiums earned $26,682

Coinsurance 1,689

Interest and other income 242

Total revenues $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

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 not, what is the economic

rationale behind its reported depreciation expense?

c. Explain the provision for bad debts entry.

d. What is BestCare’s total margin? How can it be interpreted?

11.3 Consider this income statement:

Green Valley Nursing Home, Inc.

Statement of Income

Year Ended December 31, 2008

Revenue:

Resident services 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

Provision for bad debts 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

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 other two income statements did not?

c. What is Green Valley’s total (profit) margin? How does this value compare with the values for Park Ridge

Homecare Clinic and BestCare?

d. The before-tax profit margin for Green Valley is operating income divided by total revenues. Calculate Green

Valley’s before-tax profit margin. Why may this be a better measure of expense control when comparing an

investor-owned business with a not-for-profit business?

12.1 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 was the clinic’s dollar growth in assets during 2008, and how was this growth financed?

12.2 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 organization. What was its net income for the period?

12.3 Here is financial statement information on four not-for-profit clinics:

PittmanRoseBeckmanJaffe
December 31, 2007:
Assets$ 80,000$ 100,000g$ 150,000
Liabilities50,000d$ 75,000j
Equitya60,00045,00090,000
December 31, 2008:
Assetsb130,000180,000k
Liabilities55,00062,000h80,000
Equity45,000e110,000145,000
During 2008:
Total revenuesc400,000i500,000
Total expenses330,000f360,000l

Fill in the missing values labeled a through l.

5.1 Assume that the managers of FortWinston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates:

Variable cost per visit – $5.00

Annual direct fixed costs – $500,000

Annual overhead allocation – $50,000

Expected annual utilization – 10,000 visits

a. What per visit price must be set for the service to break even? To earn an annual profit of $100,000?

b. Repeat Part a, but assume that the variable cost per visit is $10.

c. Return to the data given in the problem. Again repeat Part a, but assume that direct fixed costs are

$1,000,000.

d. Repeat Part a assuming both a $10 variable cost and $1,000,000 in direct fixed costs.

6.1 Consider the following 2008 data for Newark General Hospital (in millions of dollars):

Simple BudgetFlexible BudgetActual Results
Revenues$4.7$4.8$4.5
Costs4.14.14.2
Profit0.60.70.3

a. Calculate and interpret the two profit variances.

b. Calculate and interpret the two revenue variances.

c. Calculate and interpret the two cost variances.

d. How are the variances related?

9.1 Find the following values for a single cash flow:

a. The future value of $500 invested at 8 percent for one year

b. The future value of $500 invested at 8 percent for five years

c. The present value of $500 to be received in one year when the opportunity cost rate is 8 percent

d. The present value of $500 to be received in five years when the opportunity cost rate is 8 percent

10.1 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 analysis of the project. An up-front cost of $160,000 is needed to get the clinic in operation. Then, a net cash inflow of $1 million

is expected from operations in each of the two years of the exposition. However, the clinic has to pay the organizers of the exposition a fee for the marketing value of the opportunity. This fee, which must be paid at the end of the second year, is $2 million.

a. What are the net cash flows associated with the project?

b. What is the project’s IRR?

c. Assuming a project cost of capital of 10 percent, what is the project’s NPV?

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