I need to figure out part a and b. Consider the following financial statements f
ID: 2772257 • Letter: I
Question
I need to figure out part a and b.
Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:
BestCare HMO
Statement of Operations and Change in Net Assets
Year Ended June 30, 2012
(in thousands)
Revenue:
Premiums earned $26,682
Coinsurance $1,689
Interest and other income $242
Total revenue $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
Net assets, beginning of year $900
Net assets, end of year $2,118
BestCare HMO
Balance Sheet
Year Ended June 30, 2012
(in thousands)
Assets
Cash and cash equivalents $2,737
Net premiums receivable $821
Supplies $387
Total current assets $3,945
Net property and equipment $5,924
Total assets $9,869
Liabilities and Net Assets
Accounts payable - medical services $2,145
Accrued expenses $929
Notes payable $141
Current portion of long-term debt $241
Total current liabilities $3,456
Long-term debt $4,295
Total liabilities $7,751
Net assets - unrestricted (equity) $2,118
Total liabilities and net assets $9,869
a. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows:
Total margin 3.8%
Total asset turnover 2.1
Equity multiplier 3.2
Return on equity (ROE) 25.5%
b. calculate and interpret the following ratios for BestCare:
Industry Average
Return on assets 8.0%
Current Ratio 1.3
Days cash on hand 41 days
Average collection period 7 days
Debt ratio 69%
Debt-to-equity ratio 2.2
Times interest earned ratio 2.8
Fixed asset turnover ratio 5.2
Explanation / Answer
a. Dupont analysis:
ROE = profit margin * total asset turnover * equity multiplier.
= 3.8 * 2.1 *3.2
= 25.5%
b. calculate and iterpretation of following ratios
return on assets = annual net income/ average total assets
= 1218 / 9869
= 12.34
current ratio = current assets / current liabilities
current assets = 2737 + 821 + 387 / 2145+929+141
= 3945 / 3215
= 1.22.
debt ratio = total debt / total assets
= 241 + 4295 / 9869
= 4536 / 9869
= 45%
Debt to Equity ratio = total long term debt / share holders funds
= 4295+241 / 2118
= 2.14.
time interest earned ratio = EBIT / interest expense
=1218 /385
= 3
fixed asset turnover ratio = net sales / fixed assets = 5.2
= netsales / 5924 =5.2
= 30805 /5924 =5.2.