Chapter 13 Assignment page 419 Problem 13.1 & 13.2 13.1.a. General Hospital has
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Chapter 13 Assignment page 419 Problem 13.1 & 13.2
13.1.a. General Hospital has a current ratio of 0.5. Which of the following actions would improve (increase) this ratio? (Hint: Create a simple balance sheet that has a current ratio of 0.5. Then, Judge how the transactions below would affect the balance sheet).
1.Use cash to pay off current liabilities.
2.Collect some of the current accounts receivable.
3.Use cash to pay off some long-term debt.
4.Purchase additional inventory on credit (i.e., accounts payable)
5.Sell some of the existing inventory at cost (book value).
Insert your response here.
b. Now assume that General Hospital has a current ratio of 1.2. In this situation, which of the above actions would improve this ratio?
Insert your response here.
13.2 Southwest Physician, a medical group practice in Oklahoma City, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to have a total margin of 5 percent. The group is considering two financing alternatives. First, it can use all equity financing by requiring each physician to contribute his or her pro rate share. Second, the practice can finance up to 5o percent of its assets with a bank loan. Assuming that the debt alternative has no impact on the expected total margin, what is the difference between the expected return on equity (ROE) if the group finances with 50 percent debt versus the expected ROE if it finances entirely with equity capital?
Insert your response here.
Chapter 13 Assignment page 419 Problem 13.1 & 13.2
13.1.a. General Hospital has a current ratio of 0.5. Which of the following actions would improve (increase) this ratio? (Hint: Create a simple balance sheet that has a current ratio of 0.5. Then, Judge how the transactions below would affect the balance sheet).
1.Use cash to pay off current liabilities.
2.Collect some of the current accounts receivable.
3.Use cash to pay off some long-term debt.
4.Purchase additional inventory on credit (i.e., accounts payable)
5.Sell some of the existing inventory at cost (book value).
Insert your response here.
b. Now assume that General Hospital has a current ratio of 1.2. In this situation, which of the above actions would improve this ratio?
Insert your response here.
13.2 Southwest Physician, a medical group practice in Oklahoma City, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to have a total margin of 5 percent. The group is considering two financing alternatives. First, it can use all equity financing by requiring each physician to contribute his or her pro rate share. Second, the practice can finance up to 5o percent of its assets with a bank loan. Assuming that the debt alternative has no impact on the expected total margin, what is the difference between the expected return on equity (ROE) if the group finances with 50 percent debt versus the expected ROE if it finances entirely with equity capital?
Insert your response here.
Explanation / Answer
a.
Suppose the company have following balance in balance sheet
Current Assets
Inventory 50,000
Cash 50,000
Account Receivable 50,000
Total Current Assets 150,000
Current Liabilities
Account Payable 300,000
Current Ration = Current Assets / Current Liabilities
1. Use cash to pay off current liabilities
50,000 cash paid to Accounts Payable
New Current Ration = 100,000 / 250,000 = 0.4
2. Collect some of the current accounts receivable.
50,000 Account Receivable Collected as cash
New Current Ration = 150,000 / 300,000 = 0.5
3. Use cash to pay off some long-term debt.
50,000 cash used to pay long term debt
New Current Ration = 100,000 / 300,000 = 0.33
4. Purchase additional inventory on credit.
50,000 inventory purchased on credit
New Current Ration = 200,000 / 350,000 = 0.57
5. Sell some of the existing inventory at cost
Sold 50,000 inventory as cash or on credit
New Current Ration = 150,000 / 300,000 = 0.
b.
1. Use Cash to pay off current liabilities.
13.2
Total Investment Required is $2,000,000
Total Revenue is $3,000,000
Total Margin is $150,000
1. If whole investment financed by Equity, ROE = 150,000 / 2,000,000 = 7.5%
2. If 50% of investment financed by loan, assume that interest in bank loan be 10% p.a.
Total margin less bank interest = 150,000 - 100,000 = $50,000
ROE = 50,000 / 1,000,000 = 5%
Return on Equity will be higher if Project is financed by Equity.
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