9/1/2014 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting Mini-Case Gainesville Surgicenter Inc. is a large, ambulatory surgery center owned by a group practice of surgeons in Gainesville, Florida. The 2014 financial statements for the firm are shown below: Balance Sheet as of December 31, 2014 (Thousands of dollars) Cash $1.800 Accounts payable Receivables $10.800 Notes payable Inventories $12.600 Accruals Total current assets $25.200 Total current liabilities Net fixed assets $21.600 Mortgage bonds Common stock Retained earnings Total assets $46.800 Total liabilities & equity $7.200 $3.472 $2.520 $13.192 $5.000 $2.000 $26.608 $46.800 Income Statement for 2014 (Thousands of dollars) Revenues $36.000 Operating costs $30.783 Earnings before interest and taxes $5.217 Interest $1.017 Earnings before taxes $4.200 Taxes (40%) $1.680 Net income $2.520 Dividends (60%) $1.512 Addition to retained earnings $1.008 a. Assume that the company was operating at full capacity in 2014 with regard to all items except fixed assets (operating rooms and support space); fixed assets in 2014 were utilized to only 75 percent of capacity. By what percentage could 2015 revenues increase over 2014 revenues without the need for an increase in fixed assets? b. Now suppose 2015 revenues increase by 25 percent over 2014 revenues. Use the constant growth method to develop a pro forma balance sheet and income statement as in Exhibit 14.4. Assume that Gainesville cannot sell any fixed assets and that any financing required is borrowed as notes payable at an interest rate of 12 percent. ANSWER 9/1/2014 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 1 Florida Home Health is a small home care agency owned by a group practice of nurses and physical therapists in Tampa, Florida. During the past few years, the company reported the following revenues: Year 1 2 3 4 5 6 Revenues (thousands) $2,058 $2,534 $2,472 $2,850 $3,000 ? Predict Florida Home Health's Year 6 revenue. ANSWER A 1 2 3 4 5 6 7 8 9 10 B C D E F G UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT H Chapter 14 -- Financial Forecasting PROBLEM 2 Last year, Wei Guan Inc. had $350 million of sales, and it had $270 million of fixed assets that were used at 65 percent of capacity. In millions, by how much could Wei Guan's sales increase before it is required to increase its fixed assets? ANSWER I UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 3 Kamath-Meier Corporation's CFO uses this equation, which was developed by regressing inventories on sales over the past five years, to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales). The company expects sales of $400 million during the current year, and it expects sales to grow by 30 percent next year. What is the inventory forecast for next year? All dollars are in millions. ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 4 Last year, Godinho Corp. had $250 million of sales, and it had $75 million of fixed assets that were being operated at 80 percent of capacity. In millions, how large could sales have been if the company had operated at full capacity? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 5 Last year, Handorf-Zhu Inc. had $850 million of sales, and it had $425 million of fixed assets that were used at only 60 percent of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 6 Last year, Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/sales ratio was 40 percent. However, its fixed assets were used at only 75 percent of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target fixed assets/sales ratio at the level it would have had had it been operating at full capacity. What target FA/sales ratio should the company set? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 7 Last year, Emery Industries had $450 million of sales and $225 million of fixed assets, so its FA/sales ratio was 50 percent. However, its fixed assets were used at only 65 percent of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 8 Jill's Wigs Inc. had the following balance sheet last year: Cash Accounts receivable Inventory Net fixed assets $800 $450 $950 $34,000 Total assets $36,200 Accounts payable Accrued wages Notes payable Mortgage Common stock Retained earnings Total liabilities and equity $350 $150 $2,000 $26,500 $3,200 $4,000 $36,200 Jill has just invented a nonslip wig for cancer patients which she expects will cause sales to double from $10,000 to $20,000, increasing net income to $1,000. She feels that she can handle the increase without adding any fixed assets. Will Jill need any outside capital if she pays no dividends and, if yes, how much? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 9 United Health Products has the following balance sheet: Current assets $5,000 Net fixed assets $5,000 Total assets $10,000 Accounts payable Notes payable Long-term debt Common equity Total liabilities and equity $1,000 $1,000 $4,000 $4,000 $10,000 Business has been slow; therefore, fixed assets are vastly underutilized. Management believes it can double sales next year with the introduction of a new product. No new fixed assets will be required, and management expects that there will be no earnings retained next year. What is next year's external financing requirement? ANSWER UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 14 -- Financial Forecasting PROBLEM 10 Taylor Technologies is a small manufacturer of ultrasound equipment. The Year 1 financial statements for the firm are shown below: Balance Sheet as of December 31, Year 1 (thousands of dollars) Cash $90,000 Accounts payable Receivables $180,000 Notes payable Inventories $360,000 Accruals Total current assets $630,000 Total current liabilities Net fixed assets Total assets $720,000 $1,350,000 Common stock Retained earnings Total liabil & equity $180,000 $78,000 $90,000 $348,000 $900,000 $102,000 $1,350,000 Income Statement for Year 1 (thousands of dollars) Sales $1,800,000 Operating costs $1,639,860 Earnings before interest and taxes $160,140 Interest $10,140 Earnings before taxes $150,000 Taxes (40%) $60,000 Net income $90,000 Dividends (60%) $54,000 Addition to retained earnings $36,000 Suppose that in Year 2, sales increase by 10 percent over Year 1 sales. Construct the pro forma financial statements using the constant growth method. Assume the firm operated at full capacity in Year 1. What will be the external funding requirement? ANSWER 
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