List and Discuss the Three Payment-determination Bases.
1. List and discuss the three payment-determination bases.
2. List and describe the three categories of net assets.
Multiple Choice (4 @ 4 = 16)
3. Which of the following is not a “principle” of FINANCIAL accounting?
A. Historical cost
B. Revenue recognition
E. Full disclosure
4. Accounts receivable (net) increased by $500,000 during the year. This increase has what effect on cash flow?
A. Reduces it
B. Increases it
C. No effect
5. In 20X4, Olentangy Health Care (OHC)’s cost of capital was 6%. Its INVESTMENTSon a historical cost valuation basis are $80,000, on a replacement cost basis are $100,000, and on a current MARKET value basis are $110,000. If you were on OHC’s board, what minimum level of annual cash flow would you require in order to continue operations and proceed with planned significant new INVESTMENTS?
$6,000. Significant new INVESTMENTS should be made only if the return based on replacement cost is greater than the firm’s cost of capital. So, what cash flow, when divided $100,000, gives 6%.
6. Beverly Enterprises owns a nursing home that is currently earning $2.0 million in cash flow on an annual basis, but this amount is expected to drop in the future. The nursing home has a book value of $20 million, a replacement cost of $40 million, and a current sale value of $10 million. If Beverly Enterprises has a cost of capital equal to 15 percent, at what value of annual cash flow would Beverly Enterprises be likely to sell the nursing home?
Numeric Problems (4 @ 6 = 24)
For the following four problems, start with the price-setting example from the text. The initial assumptions are provided in the table below.
Total cost $100,000
Total volume 1,000
Average cost $100
Medicare (payment rate = $95) 400
Medicaid (payment rate = $75) 100
Managed Care # 1 (payment rate = $110) 300
Managed Care # 2 (pay 80% of charges) 100
Uninsured (pay 10% of charges) 100
Total all payers 1,000
Desired net income $5,000
7. Medicare and Medicaid presently account for 50% of the volume. The hospital wishes to reduce its dependence on government payers. Assume that Medicare volume is reduced to 380 patients and Medicaid volume is reduced to 90 patients. The volume from managed-care plan #1 rises to 320 patients from 300. The volume from managed-care plan #2 increases to 110 patients. Thus, total volume is unchanged at 1,000 visits. What is the new price necessary assuming all other factors are unchanged?
8. Start with the original assumptions. The hospital is facing pressure from public-interest groups to control the prices it charges to the uninsured. Assume that the hospital is able through various efficiencies to cut its per-visit cost by 5%. It also negotiates a 7% increase with managed-care plan #1. Assuming all other factors are unchanged, what is the new required price?
9. Start with the original assumptions. Notice that managed care plan #1 receives a much lower price in return for sending a larger volume of patients. Managed care plan #2 (MC#2) wants to pay a lower cost per case and is willing to send 250 more patients (350 total from MC#2) to the clinic in return for a rate of $110 per case. Assume that the average cost per case drops to $90 due to the economies of scale. All other assumptions are unchanged. What is the new required price?
10. Start with the assumptions in problem 9. But now assume that the additional volume does not enable enough economies-of-scale to reduce the average cost per case as much as originally anticipated. Assume now that the average cost per case drops only to $95. What is the new required price?
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