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Goup Number: 14 Group Project 2 - Financial Condition Analysis John Green, a recent graduate with...

Goup Number: 14
Group Project 2 - Financial Condition Analysis
John Green, a recent graduate with four years of for-profit health management experience, was
recently brought in as assistant to the chairman of the board of Digital Diagnostics, a manufacturer of
clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices outside its
home territory, and launched an expensive advertising campaign. Digital's results were not satisfactory,
to put it mildly. Its board of directors, which consisted of its president and vice president plus its major
stockholders (who were all local business people), was most upset when directors learned how the expansion
was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the cut off
credit. As a result, Eddie Sanders, Digital’s president, was informed that changes would have to be made, and
quickly, or he would be fired. Also, at the board's insistence, John Green was brought in and given the job of
assistant to Wendy Smith, a retired banker who was Digital's chairwoman and largest stockholder. Sanders
agreed to give up a few of his golfing days and help nurse the company back to health, with Green's assistance.
Green began by gathering financial statements and other data, shown below. The data show the dire situation
that Digital Diagnostics was in after the expansion program. Thus far, sales have not been up to the
forecasted level, costs have been higher than were projected, and a large loss occurred in Year 2, rather than
the expected profit. Green examined monthly data for Year 2 (not given in the case), and he detected an
improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early
months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly
data. Also, it appears to be taking longer for the advertising program to get the message across, for the new
sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words,
the lags between spending money and deriving benefits were longer thanDigital's managers had anticipated.
For these reasons, Green and Sanders see hope for the company—provided it can survive in the short run.
Green must prepare an analysis of where the company is now, what it must do to regain its financial health,
and what actions should be taken. Green requested your group to complete this assigned task for him.
Use this Excel Workbook to perform the quantitative parts of the analysis and prepare the report as a Word document.
The report shpuld include only the interpretations of the quantitative results. How you found these results are to be shown in this Excel Workbook.
Submit both files via Blackboard as instructed.
Digital Diagnostics
Statement of Operations
Yr 1 Actual Yr 2 Actual Yr 3 Projected
Revenue:
Net patient service revenue $3,432,000 $5,834,400 $7,035,600
Other revenue $0 $0 $0
    Total revenues $3,432,000 $5,834,400 $7,035,600
Expenses:
Salaries and benefits $2,864,000 $4,980,000 $5,800,000
Supplies $240,000 $620,000 $512,960
Insurance and other $50,000 $50,000 $50,000
Drugs $50,000 $50,000 $50,000
Depreciation $18,900 $116,960 $120,000
Interest $62,500 $176,000 $80,000
    Total expenses $3,285,400 $5,992,960 $6,612,960
Operating income $146,600 -$158,560 $422,640
Provision for income taxes $58,640 -$63,424 $169,056
Net income $87,960 -$95,136 $253,584
Digital Diagnostics
Balance Sheet
Yr 1 Actual Yr 2 Actual Yr 3 Projected
Assets
Current assets:
Cash $9,000 $7,282 $14,000
Marketable securities $48,600 $20,000 $71,632
Net accounts receivable $351,200 $632,160 $878,000
Inventories $715,200 $1,287,360 $1,716,480
    Total current assets $1,124,000 $1,946,802 $2,680,112
Property and equipment $491,000 $1,202,950 $1,220,000
Less accumulated depreciation $146,200 $263,160 $383,160
Net property and equipment $344,800 $939,790 $836,840
Total assets $1,468,800 $2,886,592 $3,516,952
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $145,600 $324,000 $359,800
Accrued expenses $136,000 $284,960 $380,000
Notes payable $120,000 $640,000 $220,000
Current portion of long-term debt $80,000 $80,000 $80,000
    Total current liabilities $481,600 $1,328,960 $1,039,800
Long-term debt $323,432 $1,000,000 $500,000
Shareholders' equity:
Common stock $460,000 $460,000 $1,680,936
Retained earnings $203,768 $97,632 $296,216
    Total shareholders' equity $663,768 $557,632 $1,977,152
Total liabilities and shareholders' equity $1,468,800 $2,886,592 $3,516,952
Other data:
Stock price $8.50 $6.00 $12.17
Shares outstanding 100,000 100,000 250,000
Tax rate 40% 40% 40%
Lease payments $40,000 $40,000 $40,000
ANSWER
Industry
Yr 1 Actual Yr 2 Actual Yr 3 Projected Average
Profitability ratios
Total margin 4% -3% 6% 3.6%
Return on assets 6% -3% 7% 9.0%
Return on equity 13% -17% 13% 17.9%
Liquidity ratios
Current ratio 2.33 1.46 2.58 2.70
Days cash on hand 1.01 0.45 0.79 22.0
Debt management (capital structure) ratios
Debt ratio 55% 81% 44% 50.0%
Debt to equity ratio 0.49 1.79 0.25 2.5
Times-interest-earned ratio 1.35 -1.9 4.28 6.2
Cash flow coverage ratio 1.65 -1.24 5.78 8.00
Asset management (activity) ratios
Fixed asset turnover 9.95 6.21 8.41 7.00
Total asset turnover 2.34 2.02 2 2.50
Days sales outstanding 37.35 39.55 45.55 32.0
Other ratios
Average age of plant 6.1
Earnings per share n/a
Book value per share n/a
Price/earnings ratio 16.20
Market/book ratio 2.90
Digital Diagnostics
Common Size Statement of Operations
Industry
Yr 1 Actual Yr 2 Actual Yr 3 Projected Average
Revenue:
Net patient service revenue 100.0% 100.0% 100.0% 100.0%
Other revenue 0.0% 0.0% 0.0% 0.0%
    Total revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Salaries and benefits 83.0% 85.0% 82.0% 84.5%
Supplies 7.0% 11.0% 7.0% 3.9%
Insurance and other 1.0% 1.0% 1.0% 0.3%
Drugs 1.0% 1.0% 1.0% 0.3%
Depreciation 1.0% 2.0% 2.0% 4.0%
Interest 2.0% 3.0% 1.0% 1.1%
    Total expenses 96.0% 103.0% 94.0% 94.1%
Operating income 4.0% -3% 6.0% 5.9%
Provision for income taxes 2.0% -1.0% 2.0% 2.4%
Net income 3.0% -2.0% 4.0% 3.5%
Digital Diagnostics
Common Size Balance Sheet Industry
Yr 1 Actual Yr 2 Actual Yr 3 Projected Average
Assets
Current assets:
Cash 0.3%
Marketable securities 0.3%
Net accounts receivable 22.3%
Inventories 41.2%
    Total current assets 64.1%
Property and equipment 53.9%
Less accumulated depreciation 18.0%
Net property and equipment 35.9%
Total assets 100.0%
Liabilities and shareholders' equity
Current liabilities:
Accounts payable 10.2%
Accrued expenses 9.5%
Notes payable 2.4%
Current portion of long-term debt 1.6%
    Total current liabilities 23.7%
Long-term debt 26.3%
Shareholders' equity:
Common stock 20.0%
Retained earnings 30.0%
    Total shareholders' equity 50.0%
Total liabilities and shareholders' equity 100.0%

Please add the work on how to do it on excel. Detailed explanation please. Thank you!

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