Week 7 Assignment: Financial Analysis

Financial Analysis

To make informed decisions and achieve strategic goals, health care leaders must carefully analyze an organization’s financial position. A ratio analysis, for example, may impact decisions for strategic initiatives such as expansions, consolidations, mergers, and acquisitions. For this Assignment, you calculate financial ratios and consider their implications for organizations.

To prepare:

Review the Week 7 Assignment document in this week’s Learning Resources. Examine the financial data for the health care organizations in each scenario.

Note: Your Assignment should show effective application of triangulation of content and resources in your conclusion and recommendations.

The Assignment

Using the scenarios and financial data provided in the Financial Analysis document, calculate financial ratios and evaluate their implications on organizational decision making.

Week 7 Assignment: Financial Analysis

To make informed decisions and achieve strategic goals, health care leaders must carefully analyze an organization’s financial position. A ratio analysis, for example, may impact decisions for strategic initiatives such as expansions, consolidations, mergers, or acquisitions. For this Assignment, you calculate ratios and consider their implications for organizations. Scenario 1: ABC Hospital ABC Hospital is a rural facility in Medford, Oregon that competes with two other hospitals in delivering quality patient care in the Rogue Valley. One of the competing hospitals provides cancer treatment services similar to ABC Hospital and has been gaining a larger market share in the last 12 months because of its television and billboard ads.
Recently, the local news station covered a story about a report published by an independent research company stating that in the last five years, the Rogue Valley has experienced a steady increase of residents with pancreatic and testicular cancer. In response to this report and because of the shrinking market share, the chief executive officer (CEO) of the hospital has tasked the chief strategy officer (CSO) and the chief financial officer (CFO) with exploring whether it should make additional investments in cancer treatment services that will allow the organization to increase its capacity to serve more patients and gain a larger sector of the market.
Based on their analysis, the CSO and CFO have presented you with the following two options to review prior to the meeting with the CEO:
• Option 1: ABC Hospital invests $11,995,000 in the development of a new state- of-the-art cancer treatment center. Based on their estimates, the first year cash flow will be $2,000,000, the second year cash flow will be $4,000,000, the third year cash flow will be $5,000,000, and the fourth year cash flow will be $8,000,000. The expected return of 8.9% is used as the discount rate.
• Option 2: ABC Hospital invests $5,095,000 in a joint venture with a reputable oncology group and the hospital agrees to a 55% interest in the joint venture. Based on the estimates, the first year cash flow will be $1,500,000, the second year cash flow will be $3,000,000, the third year cash flow will be $4,500,000, and the fourth year cash flow will be $6,500,000. The expected return of 8.9% is used as the discount rate.
The Assignment
Explain which of the two options you would recommend to the CEO. You may only select one option. Support your position and show your calculations. It is essential that you use at least two different financial ratio calculations.
© 2016 Laureate Education, Inc.   Page  of 1 4
Scenario 2: Serenity Health Care Serenity Health Care is a large integrated health care system located in the Midwest. It has a 100-year tradition of providing quality patient care to its customers regardless of their ability to pay for services. Recently, the chair of the board of directors and the chief executive officer (CEO) of Hall Healthcare System, a competitive organization, approached Serenity’s CEO about a partnership because of its inability to continue to compete with Serenity and its declining financial performance.
Because Serenity is three times larger than Hall, the CEO would like to present to his board of directors a proposal in which Serenity acquires Hall Healthcare System. Here is the information that he plans to present to the board:
2015 2014
Current assets Cash and cash equivalents $2,275,884 $7,900,318 Short-term investments $3,945,998 $1,287,932 Receivables, less doubtful accounts $4,958,923 $4,000,891 Other current assets (inventory) $2,667,391 $5,590,076 Total current assets $13,848,196 $18,779,217 Limited-use assets $2,397,421 $4,932,097 Property and equipment $4,510,961 $3,982,018 Other long-term assets $2,301,810 $2,367,809 Total assets $23,058,388 $30,061,141 Liabilities and net assets Current liabilities Current portion of long-term debt $850,000 $1,562,091 Accounts payable $3,120,692 $5,990,128 Estimated third-party settlements $962,908 $1,409,610 Accrued salaries, wages, and fees $5,837,624 $7,903,871 Other accrued liabilities $2,163,187 $2,843,098 Total current liabilities $12,934,411 $19,708,798 Long-term debt, net $2,450,873 $3,906,781 Other noncurrent liabilities $938,578 $1,456,053
© 2016 Laureate Education, Inc.   Page  of 2 4
The Assignment
As a board member, calculate Hall Healthcare System’s current ratio and acid ratio to determine whether you support your CEO’s decision to acquire Hall. Support your position and show your calculations.
Current ratio = Current assets / Current liabilities
Acid ratio = Total current assets less inventory / Total current liabilities Scenario 3: Montgomery Home and Community-Based Services
Montgomery Home and Community-Based Services is considering a major expansion that will enable it to attract a different clientele to its organization. Currently, they serve only 34% of the frail elderly seniors and persons with disabilities in a three county area, with the majority of the residents working for the federal and state government. Montgomery relies 100% on local government funding to provide in home support and homemaker service to their clients. Their new chief executive officer (CEO) would like the organization to expand its revenue stream by investing in a senior multipurpose center serving healthy seniors by offering them arts and crafts and health and wellness programs. The center will also contain an Internet café offering nutritious breakfast and lunch options.
The CEO has commissioned a needs assessment, and the study’s results reveal that there are only 15 retired seniors who would be willing to pay the monthly fees to access the center. Further results reveal that there are approximately 120 seniors who will be retiring from the government in three years who would be willing to become members at the center.
The proposed costs to operate this new facility are as follows:
Monthly Fixed Costs • Utilities: $590 • Health/Wellness Staff: $2,500
Total liabilities $16,323,862 $25,071,632 Net assets Unrestricted $400,000 $3,712,900 Temporarily restricted $600,000 $900,000 Permanently restricted $5,734,526 $376,609 Total net assets $6,734,526 $4,989,509 Total liabilities and net assets $23,058,388 $30,061,141
© 2016 Laureate Education, Inc.   Page  of 3 4
• Arts/Crafts Staff: $2,000 • Supplies: $800 • Fitness Equipment Maintenance Contract: $200
Variable Costs • Monthly Membership Fee: $105 • Monthly Lunch Cost: $25 • Monthly Breakfast Cost: $15
Based on the information above, the initial investment to establish the center is $317,880. The organization anticipates that it will generate $25,700 of revenues in the first year, $40,000 in the second year, $78,000 in the third year, $225,000 in the fourth year, and $310,000 in the fifth year.
The Assignment
The CEO has presented her proposal and financial information to the board of directors, and they have advised her that they are in full support of her strategy if the program is a benefit to the community and if the organization can recoup its investment in three years. Based on the information presented in the scenario, calculate the two analyses below and explain their implications.
1. Perform the break-even analysis to determine how many seniors would need to have full monthly membership and pay for breakfast and lunch for Montgomery Home and Community-Based Services to cover its monthly expenses.

Break-even volume = Total fixed costs / (Average charge per client – Average variable cost per client)
2. Calculate the payback period to determine how long it will take for the organization to recover its initial investment of establishing the senior multipurpose center.

Payback period = A + (B/C)
© 2016 Laureate Education, Inc.   Page  of 4 4

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