Case Study 2

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CASE STUDY 2
COMMUNITY GENERAL HOSPITAL

I. INTRODUCTION
Community General Hospital started in 1914 as Whittaker Memorial Hospital. A man by the name of Dr. Noland Wright was appointed as a manager at that time to review the hospital’s financial records. It turns out that Dr. Wright was trained only in the medical field not business. Unfortunately, he was the main cause for poor financial management at Community General Hospital.  By 1970, the hospital had suffered in major losses and debts with a $402,000 budget deficit at the end of 1983. The hospital took drastic steps to alleviate the dire financial situation by laying off employees, refusing non-paying patients and tightening admission criteria. By 1990, the debt was in excess of $20 million. The most important subject of the Community General Hospital study case is related to the mismanagement of the institution, its executive reorganization, and the financial agony it undergoes. Community General Hospital has undergone three decades of difficult financial situations that had not been overcome. Overall, Community General Hospital needs to assess its risk for bankruptcy by calculating its z-score. From an investment standpoint, it needs to assess how risky the company is viewed as a whole and if any illegal activities are being condoned.

II. METHODOLOGY
1.Ratios
2.Z-Score
3.CAPM
4.Net Present Value

1.RATIOS
A.Current Ratio
= Current Assets / Current Liabilities

B.Acid-Test Ratio
= (Cash + Accounts Receivable + Short Term Investments) / Current Liabilities
= (Current Assets - Inventory) / Current Liabilities

C.Fixed Asset Turnover
= Sales / Total Fixed Assets

D. Total Asset Turnover
= Sales / Total Assets

E. Debt Ratio
= Total Debt / Total Assets
= (Short Term Notes + Long Term Debt) / Total Assets

F. Times Interest Earned
= EBIT / Interest Expense

G. Net Profit Margin
= Net Profit / Revenue
= Net Income / Sales
Net Profit: Revenue – COGS – Operating Expense – Interest and Taxes

H. Return on Total Assets
= EBIT / Total Net Assets
= EBIT / Total Assets

I. Return on Net Worth
= Net Income / Net Worth
= Net Income / (Common Stock + Capital Surplus)
Net Worth: Owner’s Equity: Assets – Liabilities: Common Stock + Capital Surplus

2.Z-SCORE
= 1.2X1 + 1.4X2 + 3.3X3 + .6X4 + 1.0X5
Z-Score: overall index of corporate health
X1: working capital divided by total assets: (current assets – current liabilities) / ta
X2: retained earnings divided by total assets: (beginning RE + Net Income – Dividends) / ta
X3: EBIT divided by total assets: net income before interest and taxes / ta
X4: market value of preferred and common equity divided by total liabilities: (p+c equity) / lia
X5: sales divided by total assets

3.CAPM (K)
Risk Free + Beta (Expected Market Return – Risk Free Rate) Risk free = 5% based on Gov Bonds which are risk free
Beta = .97 (assumed)
Expected Market return= 10 -15% (assumed)

4.Net Present Value
Rn (1 + R)m – Cost
Rn (1994) = $597,986; Rn (1995) = $503,203
R= assume its 5%
m = number of years which is 2 years (1994 & 1995)

III. SOLUTION

1. RATIOS
A.Current Ratio
1994 = 0.6022
1995 = 0.6754

B.Acid-Test Ratio
1994 = 0.5230
1995 = 0.5863

C.Fixed Asset Turnover
1994 = 1.27X
1995 = 1.55X

D. Total Asset Turnover
1994 = 0.840X
1995 = 0.959X
E. Debt Ratio
1994 = 2.50
1995 = 2.52

F. Times Interest Earned
1994 = 3.44X
1995 = 5.92X

G. Net Profit Margin
1994 = -8.83%
1995 = -6.63%

H. Return on Total Assets
1994 = 8.39%
1995 = 6.14%

I. Return on Net Worth
1994 = -0.1286
1995 = -0.1117

2.Z-SCORE
1994 = 1.2($2,696,392 - $4,477,630) + 1.4 (-$787,446)  + 3.3($121,056) +
$10,600,209 $10,600,209$10,600,209  +0.6($10,600,209 - $26,449,701)  + 1($8,914,668)
$10,600,209...
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