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CASE31

CASE 31
8/13/13

Student Version
RIVER COMMUNITY HOSPITAL (B)
Financial Forecasting

Case 1 illustrated an extensive financial and operating analysis of River Community Hospital.
In this case (Case 31), students prepare a financial plan, consisting primarily of pro forma
(forecasted) financial statements for the same hospital.
This case requires many assumptions about future events at the hospital. The sole basis for making
these judgments are the historical data (and analyses conducted in Case 1 if applicable) plus
knowledge of general trends in hospital industry.
The model was constructed using the percentage of sales (constant growth rate) method of
forecasting with a totally arbitrary 10 percent growth for all balance sheet accounts and
income statement items that might be tied to volume. The 10 percent growth rate multipliers are
contained in Column I. To complete the case, students must make their own judgments about the
best forecasting technique to apply to each line as well as the input assumptions needed for the
technique selected. In essence, each line must be analyzed separately and modified as needed
to create the best possible forecast. Note that the model extends out to Column S. Also, note
that the student version of the model is the same as the instructor version.
The model is circular, and hence may require multiple recalculations before the forecasted
values stabilize. To account for this, the model is set to automatically recalculate 100 times.
Note that the model is set up very simplistically, in that any external funds needed are automatically
obtained by long-term debt financing. Furthermore, any surplus funds generated are automatically
added to the cash and investments account. Any change to these assumptions requires
revision of the model.

INPUT DATA:
Debt interest rate

KEY OUTPUT:
5.0%

2013
Op margin
6.7%
ROA
4.5%
Debt ratio
40.9%
ROE
7.7%
Current ratio
2.67
Cumulative external funds =
(in millions)

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2014
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2018
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CASE31

Statements of Operations:
(Millions of Dollars)
REVENUES
Net patient service revenue
Other revenue
Total revenues

2011
2012
2013
$28.796 $30.576 $34.584
1.237
1.853
1.834
$30.033 $32.429 $36.418

EXPENSES
Salaries and wages
Fringe benefits
Interest expense
Depreciation
Medical supplies and drugs
Professional liability
Other
Total expenses

$12.245
1.830
1.181
2.350
0.622
0.140
9.036
$27.404

$12.468
2.408
1.598
2.658
0.655
0.201
10.339
$30.327

$13.994
2.568
1.776
2.778
0.776
0.218
11.848
$33.958

$2.629

$2.102

$2.458

2011

2012

2013

$4.673
4.359
0.432
0.308
$9.772
$47.786
11.820
$35.966

$5.069
5.674
0.523
0.703
$11.969
$55.333
14.338
$40.995

$2.795
7.413
0.601
0.923
$11.732
$59.552
17.009
$42.543

$45.738

$52.964

$54.275

$0.928
1.460

$1.253
1.503

$1.760
1.176

Excess of revenues over expenses

Balance Sheets:

ASSETS
Cash and investments
Accounts receivable (net)
Inventories
Other current assets
Total current assets
Gross plant and equipment
Accumulated depreciation
Net plant and equipment
Total assets
LIABILITIES AND FUND BALANCE
Accounts payable
Accrued expenses
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CASE31
Current portion of long-term debt
Total current liabilities
Long-term debt
Net assets

0.110
$2.498
$15.673
27.567

1.341
$4.097
$19.222
29.645

1.465
$4.401
$17.795
32.079

Total liabilities and net assets

$45.738

$52.964

$54.275

External funds needed


Additional LT debt
Added interest exp
Cumulative external funds =
Statements of Cash Flows:
(Millions of Dollars)
2012

2013

CASH FLOWS FROM OPERATING ACTIVITIES


Net income
Depreciation and noncash expenses
Change in accounts receivable
Change in inventories
Change in other current assets
Change in accounts payable
Change in accrued expenses
Net cash flow from operations

$2.102
2.633
(1.315)
(0.091)
(0.395)
0.325
0.043
$3.302

$2.458
2.756
(1.739)
(0.078)
(0.220)
0.507
(0.327)
$3.357

CASH FLOWS FROM INVESTING ACTIVITIES


Investment in plant and equipment

($7.686)

($4.328)

CASH FLOWS FROM FINANCING ACTIVITIES


Change in long-term debt
Change in current portion of long-term debt
Net cash flow from financing

3.549
1.231
$4.780

(1.427)
0.124
($1.303)

NET INCREASE (DECREASE) IN CASH


BEGINNING CASH/INVESTMENTS

$0.396
4.673

($2.274)
5.069

ENDING CASH/INVESTMENTS

$5.069

$2.795

Cash account check


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CASE31

Note: "Depreciation and noncash expenses" and "Investment in plant and equipment" data in the statements
somewhat different than they would be if calculated directly from the other financial statements becau
Financial Statement Analysis: Du Pont Analysis

Total margin
Total asset turnover
ROA = TM x TATO
Equity multiplier

2011
8.75%
0.66
5.75%
1.66

2012
6.48%
0.61
3.97%
1.79

2013
6.75%
0.67
4.53%
1.69

ROE = ROA x Equity multiplier

9.54%

7.09%

7.66%

Check ROE (Excess/Net equity)

9.54%

7.09%

7.66%

2011

2012

2013

Profitability Ratios:
Total margin
Return on assets
Return equity

8.75%
5.75%
9.54%

6.48%
3.97%
7.09%

6.75%
4.53%
7.66%

Liquidity Ratios:
Current ratio
Days cash on hand

3.91
68.08

2.92
66.87

2.67
32.72

Debt Management Ratios:


Debt ratio
LT debt to equity
Times interest earned
Fixed charge coverage
Cash flow coverage

39.73%
56.85%
3.23
2.95
4.66

44.03%
64.84%
2.32
1.26
3.53

40.90%
55.47%
2.38
1.31
3.52

Asset Management Ratios:


Inventory turnover
Current asset turnover
Fixed asset turnover

66.66
2.95
0.80

58.46
2.55
0.75

57.54
2.95
0.81

Financial Statement Analysis: Ratios

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CASE31
Total asset turnover
Avg collection period
Average payment period

Other Ratios:
Average age of plant

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0.63
55.25
36.39

0.58
67.73
54.05

0.64
78.24
51.52

5.03

5.39

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CASE31
Copyright 2014 Health
Administration Press

Hospital.

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CASE31

Growth Rate
Forecast
13.0%
0.5%
NA

Initial
2014
$39.080
$1.843
$40.923

Final
2014
$39.080
$1.843
$40.923

Initial
2015
$44.160
$1.852
$46.013

Final
2015
$44.160
$1.852
$46.013

Initial
2016
$49.901
$1.862
$51.763

Final
2016
$49.901
$1.862
$51.763

15.0%
8.0%
NA
3.0%
20.0%
6.0%
14.5%
NA

$16.093
2.773
1.776
2.861
0.931
0.231
13.566
$38.232

$16.093
2.773
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2.861
0.931
0.231
13.566
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$18.507
2.995
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2.947
1.117
0.245
15.533
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$18.507
2.995
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2.947
1.117
0.245
15.533
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$21.283
3.235
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3.036
1.341
0.260
17.785
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$21.283
3.235
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3.036
1.341
0.260
17.785
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NA

$2.691

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Growth Rate
Forecast

Initial
2014

Final
2014

Initial
2015

Final
2015

Initial
2016

Final
2016

NA
31.0%
10.0%
15.0%
NA
5.0%
NA
NA

$3.158
9.711
0.661
1.061
$14.592
$62.530
19.870
$42.659

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0.661
1.061
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$62.530
19.870
$42.659

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12.721
0.727
1.221
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$65.656
22.818
$42.839

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12.721
0.727
1.221
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$65.656
22.818
$42.839

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16.665
0.800
1.404
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$68.939
25.853
$43.086

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16.665
0.800
1.404
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$68.939
25.853
$43.086

NA

$57.251

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30.0%
-5.0%

$2.288
1.117

$2.288
1.117

$2.974
1.061

$2.974
1.061

$3.867
1.008

$3.867
1.008

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CASE31
5.0%
NA
NA
NA

1.538
$4.943
$16.257
34.770

1.538
$4.943
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1.615
$5.651
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1.615
$5.651
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1.696
$6.571
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1.696
$6.571
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NA

$55.970

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$1.281
$1.281
$0.064

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2014

2015

2016

2017

2018

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2.861
(2.298)
(0.060)
(0.138)
0.528
(0.059)
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2.947
(3.010)
(0.066)
(0.159)
0.686
(0.056)
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3.036
(3.944)
(0.073)
(0.183)
0.892
(0.053)
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3.127
(5.166)
(0.080)
(0.211)
1.160
(0.050)
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3.220
(6.768)
(0.088)
(0.242)
1.508
(0.048)
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($2.978)

($3.126)

($3.283)

($3.447)

($3.619)

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0.073
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0.077
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0.081
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0.085
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0.089
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2.795

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ernal funds needed


ditional LT debt
ded interest exp
mulative external funds =

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CASE31

nt" data in the statements of cash flows are


nancial statements because of asset revaluations.

Industry
Median
3.48%
0.89
3.10%
1.94

2014
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2015
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2016
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2017
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2018
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6.01%

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Industry
Median

2014

2015

2016

2017

2018

3.48%
3.10%
6.01%

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1.99
15.89

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48.40%
64.70%
2.23
1.35
3.22

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63.95
3.38
1.76

59.11
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0.92

60.73
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1.03

62.38
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1.16

64.08
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1.30

65.83
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1.45

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CASE31
0.89
75.67
56.52

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90.70
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105.15
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121.90
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141.31
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163.82
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7.39

6.94

7.74

8.52

9.27

10.00

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CASE31

Initial
2017
$56.388
$1.871
$58.259

Final
2017
$56.388
$1.871
$58.259

Initial
2018
$63.719
$1.880
$65.599

Final
2018
$63.719
$1.880
$65.599

$24.476
3.494
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3.127
1.609
0.275
20.364
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$24.476
3.494
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3.127
1.609
0.275
20.364
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$28.147
3.773
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3.220
1.931
0.292
23.317
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$28.147
3.773
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3.220
1.931
0.292
23.317
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Initial
2017

Final
2017

Initial
2018

Final
2018

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21.831
0.880
1.614
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$72.386
28.980
$43.406

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21.831
0.880
1.614
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$72.386
28.980
$43.406

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28.599
0.968
1.856
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$76.005
32.200
$43.805

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28.599
0.968
1.856
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$76.005
32.200
$43.805

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$5.027
0.958

$5.027
0.958

$6.535
0.910

$6.535
0.910
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1.781
$7.765
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1.781
$7.765
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1.870
$9.314
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1.870
$9.314
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END

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