Question

Problem 1

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, 2XXX
			(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
Rent				$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, 2XXX
			(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 (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 (ROA)			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 (TIE) ratio			2.8
	Fixed asset turnover ratio			5.2

Answer 1