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    Green Valeey Nursing Home, Inc.: Financial Condition Analysis

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    Financial Condition Analysis



    a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve
    (i.e., increase) this ratio?
    - Use cash to pay off current liabilities.
    - Collect some of the current accounts receivable.
    - Use cash to pay off some long-term debt.
    - Purchase additional inventory on credit (i.e., accounts payable).
    - Sell some of the existing inventory at cost.

    b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio?


    For each ratio calculated in parts a and b, in question 17.1, Be sure to provide an assessment of how Green Valley is doing in comparison to industry averages.

    Consider the following financial statements for Green Valley Nursing Home, Inc. a for profit long-term care facility:
    Green Valley Nursing Home Inc.
    Statement of Income and Retained Earnings
    Year Ended December 31, 2011

    Net patient service revenue $3,163,258
    Other revenue 106,146
    Total Revenue $3,269,404
    Salaries and benefits $1,515,438
    Medical supplies and drugs 966,781
    Insurance and other 296,357
    Provision for bad debts 110,000
    Depreciation 85,000
    Interest 206,780
    Total expenses $3,180,356
    Operating Income $89,048
    Provision for income tax 31,167
    Net Income $57,881
    Retained earnings, beginning of year $199,961
    Retained earnings, end of year $257,842

    Green Valley Nursing Home Inc.
    Balance Sheet
    December 31, 2011

    Current assets:
    Cash $105,737
    Marketable securities 200,000
    Net patient accounts receivables 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
    Total current liabilities $445,150
    Long term debt $1,700,000
    Shareholders' Equity:
    Common stock, $10 par value $100,000
    Retained earnings 257,842
    Total shareholder's equity $357,842
    Total liabilities and shareholders' equity $2,502,992

    Additional Questions

    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 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
    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.
    - What is the firm's price/earnings ratio?
    - What is its market/book ratio?


    d. Refer back to Textbook Problem 17.5. Recast the financial statements for Green Valley into common size financial statements. Describe at least two advantages of a common size presentation of financial statements.

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    Solution Summary

    This solution contains step-by-step calculations to determine the changes in current assets and current liabilities to increase current ratio, it also recast financial statements as common size and computes financial ratios and DuPont.