Green Valley Nursing Home Inc. Balance Sheet December 31, 2011 ________________________________________________________________________ Assets Current Assets: Cash $105,737 Marketable securities $200,000 Net patient accounts receivable $215,600 Supplies $ 87,655 Total current assets $608,992 Property and equipment $2,250,000 Less accumulated depreciation $ 356,000 Net property and equipment $1,894,000 Total assets $2,502,992 Liabilities and Shareholder’s Equity Current liabilities: Accounts payable $ 72,250 Accrued expenses $ 192,900 Notes payable $ 100,000 Current portion of long-term debt $ 80,000 Shareholder’s Equity: Common stock $10 par value $100,000 Retained earnings $257,842 Total shareholder’s equity $357,842 Total liabilities and shareholder’s equity $2,502,992 a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows: Total margin 3.5% Total asset turnover 1.5% Equity multiplier 2.5% Return on equity (ROE) 13.1% b. Calculate and interpret the following ratios: Industry average Return on assets (ROA) 5.2% Current ratio 2.0% Days cash on hand 22 days Average collection period 19 days Debt ratio 71% Debt-to-equity ratio 2.5% Times interest earned (TIE) ratio 2.6 Fixed asset turnover ratio 1.4 c. Assume that there are 10,000 shares of Green Valley’s stock outstanding and that some recently sold for $45 per share: 1. What is the firm’s price/earnings ratio? 2. What is its market/book ratio? 18.1. Suncoast Healthcare is planning to acquire a new X-ray machine that costs $200,000. The business can either lease the machine using an operating lease or buy it using a loan from a local bank. Suncoast’s balance sheet prior to acquiring the machine is as follows: Current assets $100,000 Debt $400,000 Net fixed assets $900,000 Equity $600,000 Total assets $1,000,000 Total claims $1,000,000 a. What is Suncoast’s current debt ratio? b. What would the new debt ratio be if the machine were leased? c. What would the debt ratio be if the machine were purchased? d. Is the financial risk of the business different under the two acquisition alternatives? 18.2. Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four year useful life. It can obtain a bank loan for the entire amount and buy the MRI or it can lease the equipment. Assume that the following facts ally to the decision: • The MRI falls into the three-year class for tax depreciation so the MACRS allowances are 0.33, 0.45, 0.15 and 0.07 in years 1 through 4, respectively. • Estimated maintenance expenses are 475,000 payable at the beginning of each year whether the MRI is leased or purchased. • Big Sky’s marginal tax rate is 40% • The bank loan would have an interest rate of 15% • If leased, the lease 9rental) payments would be $00,000 payable at the end of each of the next four years. • The estimated residual (and salvage) value is $250,000 1. What are the NAL and IRR of the lease, INTERPRET EACH VALUE 2. Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What are the new NAL and the new IRR? 18.3. HealthPlan Northwest must install a new $1 million computer to track patient records in its three service areas. It plans to use the computer for only three years at which time a brand new system will be acquired that will handle both billing and patient records. The company can obtain a 10% bank loan to buy the computer or it can lease the computer for three years. Assume that the following facts apply to the decision: • The computer falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15 and 0.07 in years 1 through 4 respectively. • The company’s marginal tax rate is 34% • Tentative lease terms call for payments of $320,000 at the end of each year. • The best estimate for the value of the computer after three years of wear and tear is $200,000 1. What are the NAL and IRR of the lease? INTERPRET EACH VALUE 2. Assume now that the bank loan would cost 15% but all other facrts remain the same. What is the new NAL? 3. What is the new IRR? 18.4. Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profit and loss statements and equity reinvestment (asset) requirements are as follows in millions: 2012 2013 2014 2015 2016 Net revenues $225.0 $240.0 $250.0 $260.0 $275.0 Cash expenses $200.0 $205.0 $210.0 $215.0 $225.0 Depreciation $11.0 $12.0 $13.0 $14.0 $15.0 Earnings before interest And taxes (EBIT) $ 14.0 $23.0 $27.0 $31.0 $35.0 Interest $8.0 $9.0 $9.0 $10.0 $10.0 Earnings before taxes (EBT) $6.0 $14.0 $18.0 $21.0 $25.0 Taxes (40%) $ 2.4 $ 5.6 25.0 $ 8.4 $10.0 Net profit $3.6 $8.4 $10.8 $12.6 $15.0 Asset requirement $6.0 $6.0 $6.0 $6.0 $6.0 Briarwood’s cost of equity is 16%. The best estimate for Briarwood’s long term growth rate is 4%. 1. What is the equity value of the hospital? 2. Suppose that the expected long-ter growth rate was 6%. What impact would this change have on the equity value of the business? 3. What impact would a growth rate of 2% have on the business?