Problem 2 Consider the following financial statements for Green Valley Nursing H
ID: 343227 • Letter: P
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Problem 2 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, 2XXx Revenue: Net patient service revenue Other revenue 53,163,258 S106,146 S3,269.404 Total revenues Expenses Salaries and benefits Medical supplies and drugs Insurance and other Rent Depreciation Interest Total expenses S1,515,438 966,781 S296.357 S110,000 585,000 S3,180,356 $89,048 S31.167 Operating income Provision for income taxes Net income Retained earnings, beginning ofyear Retained carnings, end of year S199,961 $257,842 Green Valley Nursing Home, Inc. Balance Sheet Year Ended December 31, 2xxx Assets Current assets: Cash Marketable securities Net patient accounts receivable Supplies Total current assets S105,737 S200,000 S215,61MO 87,655 $608,992 S2,250,000 Property and equipmernt Less accumulated depreciation Net property and equipment Total assets $1,894,000 $2,502,992 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Acerued expenses Notes payable Current portion of long-term debt $72,250 $192,900 $100,000 $80,000 $445,150 $1,700,0O0 Total current liabilities Long-term debt Shareholders' equity: Common stock, $10 par value Retained earnings Total shareholders' equity $100,000 $257,842 357,842 Total liabilities and shareholders' equity $2.502.992 b. Calculate and interpret the following ratios: Industry average Return on assets (ROA) Current ratio Days cash on hand Average collection period 5.2% 2.0 22 days 19 days ratio Debt-to-equity ratio 71% 2.5 Times interest earned (TIE) ratio Fixed asset turnover ratio 1.4 c. Assume that there are 10,000 shares of Green Valley's stock outstanding and that some recent for $45 per share - What is the firm's price/ earnings ratio? What is its market/ book ratio?Explanation / Answer
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Answer
b) Return on assets = Profit after tax ÷ Total assets
= $57,881÷$2,502,992
= 2.31%
Industry average was 5.2%
Firm is not up to industry average for using assets to generate profits.
Current ratio = Current assets ÷ Current liabilities
= $608,992÷$445,150
= 1.37
Industry average was 2.0
Idle ratio was 1. Though the current ratio was less than the industry it has the enough liquidity.
Days cash on hand
= Cash and cash equivalents ÷ Cash operating expenses per day
= ($105,737+$200,000) ÷ [($1,515,438+ 966,781+ 296,357) ÷ 365]
= 40.16
Industry average was 22 days.
Therefore, firm has more liquidity than the other companies in the industry.
Average collection period = (Accounts receivable × 365) ÷ Total sales
= ($215,600×365) ÷ $3,269,404
= 24.07
Industry average was 19 days.
Collection period of the company was more than the industry average. Company has to employ some alternatives to improve collection period.
Debt ratio = Total debt ÷ Total assets
= 1,700,000÷$2,502,992
= 67.92%
Industry average was 71%
Debt ratio is almost equal to industry average. Hence, the firm has similar risk level.
Debt equity ratio = Debt ÷ Equity
= $1,700,000÷ $357,842
= 4.75
Industry average was 2.5
Idle debt equity ratio was 2:1 but the company has more than double debt equity ratio. Company should reduce debt portion in capital structure.
Times interest earned ratio
= Earnings before interest and tax ÷ Interest expense
= ($206,780+$89,048) ÷ $206,780
=1.43
Industry average was 2.6
Firm has less time interest earned ratio when compared to industry average. Firm has to reduce interest liability or has to increase firm profits.
Fixed assets turnover ratio = Total revenue ÷ Fixed assets
= $3,163,258÷ $1,894,000
= 1.67
Industry average was 1.4
Fixed assets turnover ratio of the firm was better than the industry average. Firm is efficient than the other companies in the industry to generate revenue.
(c)
Price earnings ratio = market price per share ÷ earnings per share
= $45 ÷ ($57,881÷10,000)
= 7.77 times
Market/book ratio = Market capitalization ÷ Book value
= $45×10,000 ÷ ($2,502,992- $445,150-1,700,000)
= 1.26
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