Question

17.5 Consider the following financial statements for Green Valley Nursing Home, Inc., a for-profit, long-term profit long-term care facility: 
Green Valley Nursing Home, Ince 
Statement of Income and Retained Earnings 
Year Ended December 31, 2XXX 
Revenue: 
Net patient service revenue $3,163,258 
Other revenue $106,146 
Total revenues $3,269,404 
Expenses: 
Salaries and benefits $1,515,438 
Medical supplies and drugs $966,781 
Insurance and other $296,357 
Provision for bad debts $110,000 
Depreciation $85,000 
Interest $206,780 
Total expenses $3,180,356 
Operating income $89,048 
Provision for income taxes $31,167 
Net income $57,881 
Retained earnings, beginning of year $199,961 
Retained earnings, end of year $257,842

Green Valley Nursing Home, Inc. 
Balance Sheet 
Year Ended December 31, 2XXX 
Assets 
Current Assets: 
Cash and cash equivalents $105,737 
Investments $200,000 
Net patient accounts receivable $215,600 
Supplies $87,655 
Total current assets $608,992 
Property and equipment $2,250,000 
Less accumulated depreciation $356,000 
Net property and equipment $1,894,000 
Total assets $2,502,992 
Liabilities and Shareholders’ Equity 
Current Liabilities: 
Accounts payable $72,250 
Accrued expenses $192,900 
Notes payable $100,000 
Current portion of long-term debt $80,000 
Total current liabilities $445,150 
Long-term debt $1,700,000 
Shareholders’ Equity: 
Common stock, $10 par value $100,000 
Retained earnings $257,842 
Total shareholders’ equity $357,842 
Total liabilities and shareholders’ equity $2,502,992 
a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows: 
Total margin 3.5% 
Total asset turnover 1.5 
Equity multiplier 2.5 
Return on equity (ROE) 13.1% 
b. Calculate and interpret the following ratios: 
Industry average 
Return on assets (ROA) 5.2% 
Current ratio 2.0 
Days cash on hand 22 days 
Average collection period 19 days 
Debt ratio 69% 
Debt-to-equity ratio 2.5 
Times interest earned (TIE) ratio 2.6 
Fixed asset turnover ratio 1.4 
c. Assume that there are 10,000 shares of Green Valley’s stock outstanding and that 
some recently sold for $45 per share. 
– What is the firm’s price / earnings ratio? 
– What is its market / book ratio?