Posted by W on Tuesday, February 21, 2012 at 1:01pm.
General Hospital has a current ratio of 0.5. Which of the following actions would improve (increase) this ratio? (Hint: Create a simple balance sheet that has a current ratio of 0.5. Then, judge how the transactions below would affect the balance sheet.)
1. Use cash to pay off current liabilities.
2. Collect some of the current accounts receivable.
3. Use cash to pay off some long-term debt.
4. Purchase additional inventory on credit (i.e., accounts payable).
5. Sell some of the existing inventory at cost (book value).
b. Now assume that General Hospital has a current ratio of 1.2. In this situation, which of the above actions would improve this ratio?
13.2 Southwest Physicians, a medical group practice in Oklahoma City, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to have a total margin of 5 percent. The group is considering two financing alternatives. First, it can use all-equity financing by requiring each physician to contribute his or her pro rata share. Second, the practice can finance up to 50 percent of its assets with a bank loan. Assuming that the debt alternative has no impact on the expected total margin, what is the difference between the expected return on equity (ROE) if the group finances with 50 percent debt versus the expected ROE if it finances entirely with equity capital?
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