CHAPTER 13 UHFM 7TH EDITIONJohn Green, a recent graduate with four years of for-profit health management experience, was recently brought in as assistant to the chairman of the board of Digital Diagnostics, a manufacturer of clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Digital’s results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice president plus its major stockholders (who were all local business people), was most upset when directors learned how the expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the cut off credit. As a result, Eddie Sanders, Digitalâs president, was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board’s insistence, John Green was brought in and given the job of assistant to Wendy Smith, a retired banker who was Digital’s chairwoman and largest stockholder. Sanders agreed to give up a few of his golfing days and help nurse the company back to health, with Green’s assistance. Green began by gathering financial statements and other data, shown below. The data show the dire situation that Digital Diagnostics was in after the expansion program. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in Year 2, rather than the expected profit. Green examined monthly data for Year 2 (not given in the case), and he detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message across, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer thanDigital’s managers had anticipated. For these reasons, Green and Sanders see hope for the companyâprovided it can survive in the short run. Green must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Green requested your group to complete this assigned task for him. Use this Excel Workbook to perform the quantitative parts of the analysis and prepare the report as a Word document. The report shpuld include only the interpretations of the quantitative results. How you found these results are to be shown in this Excel Workbook. Submit both files via Blackboard as instructed. Digital Diagnostics Statement of Operations Yr 1 Actual Yr 2 Actual Yr 3 Projected Revenue: Net patient service revenue $3,432,000 $5,834,400 $7,035,600 Other revenue $0 $0 $0 Total revenues $3,432,000 $5,834,400 $7,035,600 Expenses: Salaries and benefits $2,864,000 $4,980,000 $5,800,000 Supplies $240,000 $620,000 $512,960 Insurance and other $50,000 $50,000 $50,000 Drugs $50,000 $50,000 $50,000 Depreciation $18,900 $116,960 $120,000 Interest $62,500 $176,000 $80,000 Total expenses $3,285,400 $5,992,960 $6,612,960 Operating income $146,600 -$158,560 $422,640 Provision for income taxes $58,640 -$63,424 $169,056 Net income $87,960 -$95,136 $253,584 Digital Diagnostics Balance Sheet Yr 1 Actual Yr 2 Actual Yr 3 Projected Assets Current assets: Cash $9,000 $7,282 $14,000 Marketable securities $48,600 $20,000 $71,632 Net accounts receivable $351,200 $632,160 $878,000 Inventories $715,200 $1,287,360 $1,716,480 Total current assets $1,124,000 $1,946,802 $2,680,112 Property and equipment $491,000 $1,202,950 $1,220,000 Less accumulated depreciation $146,200 $263,160 $383,160 Net property and equipment $344,800 $939,790 $836,840 Total assets $1,468,800 $2,886,592 $3,516,952 Liabilities and shareholders’ equity Current liabilities: Accounts payable $145,600 $324,000 $359,800 Accrued expenses $136,000 $284,960 $380,000 Notes payable $120,000 $640,000 $220,000 Current portion of long-term debt $80,000 $80,000 $80,000 Total current liabilities $481,600 $1,328,960 $1,039,800 Long-term debt $323,432 $1,000,000 $500,000 Shareholders’ equity: Common stock $460,000 $460,000 $1,680,936 Retained earnings $203,768 $97,632 $296,216 Total shareholders’ equity $663,768 $557,632 $1,977,152 Total liabilities and shareholders’ equity $1,468,800 $2,886,592 $3,516,952 Other data: Stock price $8.50 $6.00 $12.17 Shares outstanding 100,000 100,000 250,000 Tax rate 40% 40% 40% Lease payments $40,000 $40,000 $40,000 ANSWER Industry Yr 1 Actual Yr 2 Actual Yr 3 Projected Average Profitability ratios Total margin 3.6% Return on assets 9.0% Return on equity 17.9% Liquidity ratios Current ratio 2.70 Days cash on hand 22.0 Debt management (capital structure) ratios Debt ratio 50.0% Debt to equity ratio 2.5 Times-interest-earned ratio 6.2 Cash flow coverage ratio 8.00 Asset management (activity) ratios Fixed asset turnover 7.00 Total asset turnover 2.50 Days sales outstanding 32.0 Other ratios Average age of plant 6.1 Earnings per share n/a Book value per share n/a Price/earnings ratio 16.20 Market/book ratio 2.90 Digital Diagnostics Common Size Statement of Operations Industry Yr 1 Actual Yr 2 Actual Yr 3 Projected Average Revenue: Net patient service revenue 100.0% Other revenue 0.0% Total revenues 100.0% Expenses: Salaries and benefits 84.5% Supplies 3.9% Insurance and other 0.3% Provision for bad debts 0.3% Depreciation 4.0% Interest 1.1% Total expenses 94.1% Operating income 5.9% Provision for income taxes 2.4% Net income 3.5% Digital Diagnostics Common Size Balance Sheet Industry Yr 1 Actual Yr 2 Actual Yr 3 Projected Average Assets Current assets: Cash 0.3% Marketable securities 0.3% Net accounts receivable 22.3% Inventories 41.2% Total current assets 64.1% Property and equipment 53.9% Less accumulated depreciation 18.0% Net property and equipment 35.9% Total assets 100.0% Liabilities and shareholders’ equity Current liabilities: Accounts payable 10.2% Accrued expenses 9.5% Notes payable 2.4% Current portion of long-term debt 1.6% Total current liabilities 23.7% Long-term debt 26.3% Shareholders’ equity: Common stock 20.0% Retained earnings 30.0% Total shareholders’ equity 50.0% Total liabilities and shareholders’ equity 100.0%
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