Donna Jamison, a recent UNC graduate with four years of for-profit health management experience

QUESTION

Assignment:1) The attached file contains a spreadsheet that needs to be filled out. You will start by preparing an analysis of where the company is now (i.e., fill in all the empty cells in the spreadsheet).2) Next, compare your computed ratios and common size values with the industry averages. Some of your computed ratios and common size values may be quite close to the industry averages, while others may be far off. You will be asked to write about these relationships.3) Finally, you shall identify specific actions that the company should take to improve those ratios that are far outside of the industry averages. Be sure to identify specific accounts that need to be changed. For example, if both your current ratio and your debt ratio were too high (relative to the industry averages), you could suggest to sell accounts receivable to a factoring company to generate cash and then use that cash to pay down debt. These actions would lower both your current ratio and your debt ratio.Page 1—Profitability Ratios:Write one paragraph (of 70-80 words) that fully explains all of the ratios in this category. However, please do not simply list the different ratios and their calculated values. Instead, please EXPLAIN the ratio, using (a) information from the paragraphs that describe the case and (b) theoretical information that you have learned from the material that we have covered.Next, compare each company ratio (within this category) with its associated industry average and then decide which single ratio (within this category) has the biggest variance relative to its associated industry average. This may take some additional decision making steps. Now, write one paragraph (of 45-55 words) that explains how you made the decision to choose the ratio that you chose.Finally, on this same page, write one paragraph of 55-65 words. Using the ratio that you identified in the second paragraph, identify specific actions that the company should take to improve this ratio so that the ratio can be brought more in line with its associated industry average. Be very specific regarding the action to take. For example, do not say “reduce the current ratio.” Instead, say “reduce inventory by investing in inventory management software. By reducing inventory, we will reduce the current ratio.”Page 2—Debt Management Ratios:Write one paragraph (of 70-80 words) that fully explains all of the ratios in this category. However, please do not simply list the different ratios and their calculated values. Instead, please EXPLAIN the ratio, using (a) information from the paragraphs that describe the case and (b) theoretical information that you have learned from the material that we have covered.Next, compare each company ratio (within this category) with its associated industry average and then decide which single ratio (within this category) has the biggest variance relative to its associated industry average. This may take some additional decision making steps. Now, write one paragraph (of 45-55 words) that explains how you made the decision to choose the ratio that you chose.Finally, on this same page, write one paragraph of 55-65 words. Using the ratio that you identified in the second paragraph, identify specific actions that the company should take to improve this ratio so that the ratio can be brought more in line with its associated industry average. Be very specific regarding the action to take. For example, do not say “reduce debt to equity ratio.” Instead, say “sell excess inventory and use the cash to pay down debt, which will lower the debt to equity ratio.”Page 3—Asset Management Ratios:Write one paragraph (of 70-80 words) that fully explains all of the ratios in this category. However, please do not simply list the different ratios and their calculated values. Instead, please EXPLAIN the ratio, using (a) information from the paragraphs that describe the case and (b) theoretical information that you have learned from the material that we have covered.Next, compare each company ratio (within this category) with its associated industry average and then decide which single ratio (within this category) has the biggest variance relative to its associated industry average. This may take some additional decision making steps. Now, write one paragraph (of 45-55 words) that explains how you made the decision to choose the ratio that you chose.Finally, on this same page, write one paragraph of 55-65 words. Using the ratio that you identified in the second paragraph, identify specific actions that the company should take to improve this ratio so that the ratio can be brought more in line with its associated industry average. Be very specific regarding the action to take. For example, do not say “reduce asset turnover ratio.” Instead, say “donate older, unused MRI machine to a third world hospital, which will result in fewer assets, thus lowering our asset turnover ratio.”Page 4—Common Size Values for the Statement of Operations:Write one paragraph (of 70-80 words) that fully explains all of the common size values in this category. However, please do not simply list the different values and their calculated values. Instead, please EXPLAIN the values, using (a) information from the paragraphs that describe the case and (b) theoretical information that you have learned from the material that we have covered.Next, compare each company common size value (within this category) with its associated industry average and then decide which single common size value (within this category) has the biggest variance relative to its associated industry average. This may take some additional decision making steps. Now, write one paragraph (of 45-55 words) that explains how you made the decision to choose the ratio that you chose.Finally, on this same page, write one paragraph of 55-65 words. Using the common size value that you identified in the second paragraph, identify specific actions that the company should take to improve this value so that the value can be brought more in line with its associated industry average. Be very specific regarding the action to take. For example, do not say “reduce depreciation.” Instead, say “sell plant assets that have become obsolete which will both reduce depreciation expense and increase net income.”Page 5—Common Size Values for the Balance Sheet:Write one paragraph (of 70-80 words) that fully explains all of the common size values in this category. However, please do not simply list the different values and their calculated values. Instead, please EXPLAIN the values, using (a) information from the paragraphs that describe the case and (b) theoretical information that you have learned from the material that we have covered.Next, compare each company common size value (within this category) with its associated industry average and then decide which single common size value (within this category) has the biggest variance relative to its associated industry average. This may take some additional decision making steps. Now, write one paragraph (of 45-55 words) that explains how you made the decision to choose the ratio that you chose.Finally, on this same page, write one paragraph of 55-65 words. Using the common size value that you identified in the second paragraph, identify specific actions that the company should take to improve this value so that the value can be brought more in line with its associated industry average. Be very specific regarding the action to take. For example, do not say “increase inventories.” Instead, say “buy additional pharmacy inventory on credit so that we can better meet the needs of our patients. This will result in carrying more inventory.”Donna Jamison, a recent UNC graduate with four years of for-profit health management experience, was brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer of clinical diagnostic equipment. The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Computron’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, Al Watkins, Computron’s president, was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board’s insistence Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was Computron’s chairman and largest stockholder. Campo agreed to give up a few of his golfing days and to help nurse the company back to health, with Jamison’s help. Jamison began by gathering financial statements and other data, shown below. The data show the dire situation that Computron 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. Jamison examined monthly data for year 2 (not given in the case), and she 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 than Computron’s managers had anticipated. For these reasons, Jamison and Campo see hope for the company—provided it can survive in the short run. Jamison 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. Computron Diagnostics Statement of Operations Yr 1 Actual Yr 2 Actual Yr 3 Projected Revenue: Net patient service revenue $34,32,000 $58,34,400 $70,35,600 Other revenue $0 $0 $0 Total revenues $34,32,000 $58,34,400 $70,35,600 Expenses: Salaries and benefits $28,64,000 $49,80,000 $58,00,000 Supplies $2,40,000 $6,20,000 $5,12,960 Insurance and other $50,000 $50,000 $50,000 Provision for bad debts $50,000 $50,000 $50,000 Depreciation $18,900 $1,16,960 $1,20,000 Interest $62,500 $1,76,000 $80,000 Total expenses $32,85,400 $59,92,960 $66,12,960 Operating income $1,46,600 -$1,58,560 $4,22,640 Provision for income taxes $58,640 -$63,424 $1,69,056 Net income $87,960 -$95,136 $2,53,584 Computron 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 $3,51,200 $6,32,160 $8,78,000 Inventories $7,15,200 $12,87,360 $17,16,480 Total current assets $11,24,000 $19,46,802 $26,80,112 Property and equipment $4,91,000 $12,02,950 $12,20,000 Less accumulated depreciation $1,46,200 $2,63,160 $3,83,160 Net property and equipment $3,44,800 $9,39,790 $8,36,840 Total assets $14,68,800 $28,86,592 $35,16,952 Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable $1,45,600 $3,24,000 $3,59,800 Accrued expenses $1,36,000 $2,84,960 $3,80,000 Notes payable $1,20,000 $6,40,000 $2,20,000 Current portion of long-term debt $80,000 $80,000 $80,000 Total current liabilities $4,81,600 $13,28,960 $10,39,800 Long-term debt $3,23,432 $10,00,000 $5,00,000 Shareholders’ equity: Common stock $4,60,000 $4,60,000 $16,80,936 Retained earnings $2,03,768 $97,632 $2,96,216 Total shareholders’ equity $6,63,768 $5,57,632 $19,77,152 Total liabilities and shareholders’ equity $14,68,800 $28,86,592 $35,16,952 Other data: Stock price $8.50 $6.00 $12.17 Shares outstanding 1,00,000 1,00,000 2,50,000 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 Computron 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% Computron 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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