Essay on Case Study 2

1152 Words Dec 2nd, 2010 5 Pages
CASE STUDY 2
COMMUNITY GENERAL HOSPITAL

I. INTRODUCTION Community General Hospital started in 1914 as Whittaker Memorial Hospital. A man by the name of Dr. Noland Wright was appointed as a manager at that time to review the hospital’s financial records. It turns out that Dr. Wright was trained only in the medical field not business. Unfortunately, he was the main cause for poor financial management at Community General Hospital. By 1970, the hospital had suffered in major losses and debts with a $402,000 budget deficit at the end of 1983. The hospital took drastic steps to alleviate the dire financial situation by laying off employees, refusing non-paying patients and tightening admission criteria. By 1990, the debt was in excess
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CAPM (K)
CAPM = 5%+.97(10%-5%) =9.85
CAPM without free risk rate = 0+.97(10% -0) =9.7
CAPM with a 3% free risk rate = 3%+.97(10%-3%) =9.79
4. Net Present Value 1/(1 + R)m = 1/(1+0.05)2 = 1 / 1.1025 = .907
Cost (1994) = $752,930; Cost (1995) = – $461,838
NPV (1994) = $597,986 (.907) – ($752,930) = $542,373 – $752,930 = – $210,556
NPV (1995) = – $503,203 (.907) – (– $461,838) = – $456,405 + $461,838 = $5433
1994 and 1995 = –205,123

IV. CONCLUSION A. The Risk Management Association reports that the average debt ratio for most companies range from 0.57 to 0.67, with relatively little variable from company to company, and anything above will be considered as high risk. In Community General Hospital it’s debt ratio appears that their assets financed are in a huge debt. In 1994, a debt of 2.5 means that debt finances are two times and half the assets. As for 1995, the hospital debt ratio is 2.52, this indicated they are in more trouble. The hospital’s assets couldn’t

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