The CEO of a hospital has announced an ambitious building and renovation project
ID: 2564593 • Letter: T
Question
The CEO of a hospital has announced an ambitious building and renovation project that will increase total assets by $35,000,000 over the next four years. You are in charge of reviewing the plan and determining if it is feasible. (Millions) Income Statement 2011 2012 2013 2014 2015 2016 2017 2018 2019 Revenues $100 $106 $112 $119 $126 ____ ____ ____ ____ Expenses 98 103 111 117 124 ____ ____ ____ ____ Net Income $2 $3 $1 $2 $2 ____ ____ ____ ____ Balance Sheet 2011 2012 2013 2014 2015 2016 2017 2018 2019 Assets $80 $82 $85 $86 $90 $98 $105 $112 $120 Current Liabilities 10 11 12 13 13 ____ ____ ____ ____ Long Term Debt 40 39 40 38 40 ____ ____ ____ ____ Fund Balance 30 32 33 35 37 ____ ____ ____ ____ A. Calculate the historical growth rates for revenues, expenses, total assets, current liabilities, and the fund balance. Revenues: _________ Expenses: _________ Total assets: _________ Current Liabilities: _________ Fund balance: _________ B. Assuming historical patterns continue, calculate the fund balance four years out (the change in fund balance is prior year fund balance +/- profit or loss). Estimate future current liabilities using its historical growth rate and calculate the amount of long term debt that will be required to balance assets with liabilities and the fund balance (LT Debt = Assets – Current Liabilities and Fund Balance). C. The long term debt to equity ratio ($40m/$37m) is 1.08(2015), assuming the board of directors wants to maintain a long term debt to equity ratio of 1.40 or less, is the plan feasible? Long Term Debt to Equity ratio(2019): _________ D. Assume the plan is not feasible, what actions can be taken to ensure LT Debt to equity < 1.25?
Explanation / Answer
A, B & C
The historical growth rates and projections for four years for fund balance and long-term debt are tabulated below. Also, mentioned at the end of the table are the Long-term debt to equity ratios which is working out to 1.31 for the year 2019. Since this is lesser than the target ratio of 1.4, the plan is feasible.
Historical
Projections
Income Statement
2011
2012
2013
2014
2015
2016
2017
2018
2019
Historical growth rates
Revenues
100.0
106.0
112.0
119.0
126.0
133.5
141.4
149.8
158.8
5.9%
Expenses
98.0
103.0
111.0
117.0
124.0
131.5
139.5
147.9
156.9
6.1%
Net income
2.0
3.0
1.0
2.0
2.0
2.0
2.0
1.9
1.9
Balance Sheet
Assets
80.0
82.0
85.0
86.0
90.0
98.0
105.0
112.0
120.0
3.0%
Current liabilities
10.0
11.0
12.0
13.0
13.0
13.9
14.8
15.8
16.9
6.8%
Long term debt
40.0
39.0
40.0
38.0
40.0
45.1
49.2
53.3
58.4
Fund balance
30.0
32.0
33.0
35.0
37.0
39.0
40.9
42.8
44.7
5.4%
LT debt to equity
1.08
1.16
1.20
1.24
1.31
Assumptions/Notes for the calculations/projections:
1. Historical growth rates given above are 4 year CAGR rates.The respective CAGR rates have been used for projections.
2. $ values have been rounded off to 1 decimal point.
D. Assuming that the plan is not feasible, LT debt to equity ratio can be lowered by increasing the equity component by way of fresh equity infusion.
Historical
Projections
Income Statement
2011
2012
2013
2014
2015
2016
2017
2018
2019
Historical growth rates
Revenues
100.0
106.0
112.0
119.0
126.0
133.5
141.4
149.8
158.8
5.9%
Expenses
98.0
103.0
111.0
117.0
124.0
131.5
139.5
147.9
156.9
6.1%
Net income
2.0
3.0
1.0
2.0
2.0
2.0
2.0
1.9
1.9
Balance Sheet
Assets
80.0
82.0
85.0
86.0
90.0
98.0
105.0
112.0
120.0
3.0%
Current liabilities
10.0
11.0
12.0
13.0
13.0
13.9
14.8
15.8
16.9
6.8%
Long term debt
40.0
39.0
40.0
38.0
40.0
45.1
49.2
53.3
58.4
Fund balance
30.0
32.0
33.0
35.0
37.0
39.0
40.9
42.8
44.7
5.4%
LT debt to equity
1.08
1.16
1.20
1.24
1.31
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