4.a. Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:
Statement of Operations and Change in Net Assets (in thousands)
Revenue:
Premiums earned $26,682
Coinsurance $1,689
Interest and other income $242
Total revenue $28,613
Expenses:
Salaries and benefits $15,154
Medical supplies and drugs $7,507
Insurance $3,963
Rent $19
Depreciation $367
Interest $385
Total expenses $27,395
Net income $1,218
Net assets, beginning of year $900
Net assets, end of year $2,118
Balance Sheet
Assets
Cash and cash equivalents $2,737
Net premiums receivable $821
Supplies $387
Total current assets $3,945
Net property and equipment $5,924
Total assets $9,869
Liabilities and Net Assets
Accounts payable - medical services $2,145
Accrued expenses $929
Notes payable $141
Current portion of long-term debt $241
Total current liabilities $3,456
Long-term debt $4,295
Total liabilities $7,751
Net assets (equity) $2,118
Total liabilities and net assets $9,869
In order to perform a Du Pont analysis on BestCare, you must first know total margin, total asset turnover, and equity multiplier.
What is Total margin?
Write your answer as a percent. Round to two decimal places.
4.b. Continuing with the previous question, what is BestCare's total asset turnover?
Round your answer to two decimal places.
4.c. Continuing with the previous questions, what is BestCare's equity multiplier?
Round your answer to two decimal places.
4.d. Now use BestCare's profit margin, total asset turnover, and equity multiplier to calculate its ROE.
Write your answer as a percent. Round to two decimal places.
4.e. If BestCare were able to lower its debt so that its equity multiplier fell to the industry average, 3.2, what would BestCare's ROE be then? (Assume everything else remains the same.)
Write your answer as a percent. Round to two decimal places.
Note what happens to ROE when debt is reduced.