Questions and Answers of Financial Management Theory

Is cross-subsidization used by providers as frequently today as it was in the past? If not, why?
What is its greatest value?
Briefly explain the conceptual process for pricing individual services.
What do you think the price should be on Windsor’s new service?Justify your answer.
Briefly explain why the base case analysis required the calculation to move up the P&L statement rather than down (the normal direction).
How are capitated revenue requirements typically expressed?
What is scenario analysis, and why is it so critical to good pricing decisions?
What is the most uncertain variable in MMC’s capitated plan pricing analysis?
Describe the following methods used to estimate the cost of individual services:a. Cost-to-charge ratio (CCR) methodb. Relative value unit (RVU) methodc. Activity-based costing (ABC) method
What is the time-driven activity-based costing method (TDABC), and how does it differ from the methods listed in question 7.1?Question 7.1Describe the following methods used to estimate the cost of
a. Using a medical group practice to illustrate your answer, explain the difference between a price setter and a price taker.b. Can most providers be classified strictly as either a price setter or a
Explain the essential differences between full cost pricing and marginal cost pricing strategies.
What would happen financially to a health services organization over time if its prices were set at:a. Full costs?b. Marginal costs?
a. What is cross-subsidization (price shifting)?b. Is it as prevalent today as it has been in the past?
a. What is target costing?b. Suppose a hospital was offered a capitation rate for a covered population of $40 per member per month (PMPM). Briefly explain how target costing would be applied in this
What is the role of accounting information in pricing decisions?
a. What is scenario analysis as applied to pricing decisions?b. Why is it such an important part of the process?
Assume that the managers of Fort Winston Hospital are setting the price for a new outpatient service. Here are relevant data estimates:a. What per visit price must be set for the service to break
The audiology department at Randall Clinic offers many services to the clinic’s patients. The three most common, along with cost and utilization data, are as follows:a. What is the fee schedule for
Allied Laboratories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs:When the tests are combined,
Assume that Valley Forge Hospital has only the following three payer groups:The hospital’s fixed costs are $38 million.a. What is the hospital’s net income?b. Assume that half of the 100,000
Bay Pines Medical Center estimates that a capitated population of 50,000 would have the following base case utilization and total cost characteristics:In addition to medical costs, Bay Pines
Assume that a primary care physician practice performs only physical examinations. However, there are three levels of examination—I, II, and III—that vary in depth and complexity.An RVU analysis
Consider the following data for a clinical laboratory:a. Using ABC techniques, determine the cost allocation rate for each activity.b. Now, using these allocation rates, estimate the total cost of
A hospital pharmacy fills three types of prescriptions. Prescription A requires refrigeration to maintain the drug’s activity. Prescription B has potentially fatal interactions with other drugs and
Consider the following data for a primary care practice that provides two types of services, A and B:a. Using ABC techniques, determine the allocation rate for each overhead activity.b. Determine the
Briefly describe the nature and use of the following corporate planning tools:a. Strategic planb. Values statementc. Mission statementd. Vision statement
Briefly describe the contents of a typical financial plan.
What is budgeting?
What are its primary purposes and benefits?
What time periods are used in budgeting?
What are the primary differences between conventional budgets and zero-based budgets?
What are the primary differences between top-down budgets and bottom-up budgets?
What are some of the budget types used within health services organizations?
Briefly describe the purpose and use of each.
How are the statistics budget, revenue and expense budgets, and operating budget related?
What are some of the key assumptions required to prepare an operating budget?
Do the required assumptions depend on the type of organization and the nature of its reimbursement contracts?
Why is the budgeted profit and loss (P&L) statement so important?
What is variance analysis, and what is its value to healthcare providers?
What are the components of profit variance? Of revenue variance?Of cost variance?
Why are planning and budgeting so important to an organization’s success?
Briefly describe the planning process. Be sure to include summaries of the strategic, operating, and financial plans.
Describe the components of a financial plan.
How are the statistics, revenue, expense, and operating budgets related?
a. What are the advantages and disadvantages of conventional budgeting versus zero-based budgeting?b. What organizational characteristics create likely candidates for zero-based budgeting?
If you were the CEO of Bayview Hospital, would you advocate a top-down or a bottom-up approach to budgeting? Explain your rationale.
a. Explain the relationships among the static budget, flexible budget, and actual results.b. Assume that a group practice has both capitated and fee-forservice(FFS) patients. Furthermore, the number
Consider the following 2020 data for Newark General Hospital (in millions of dollars):a. Calculate and interpret the profit variance.b. Calculate and interpret the revenue variance.c. Calculate and
Here are the 2020 revenues for the Wendover Group Practice Association for four different budgets (in thousands of dollars):a. What do the budget data tell you about the nature of Wendover’s
Here are the budgets of Brandon Surgery Center for the most recent historical quarter (in thousands of dollars):The center assumes that all revenues and costs are variable and hence tied directly to
Refer to Carroll Clinic’s 2020 operating budget contained in exhibit 8.3. Instead of the actual results reported in exhibit 8.4, assume the results reported below:a. Construct Carroll’s flexible
Chelsea Clinic projected the following budget information for 2020:a. Construct Chelsea Clinic’s operating budget for 2020.b. Discuss how each key budget assumption might result in a budget
Refer to problem 8.6. Chelsea Clinic’s actual results for 2020 are shown in the table below.a. Construct Chelsea Clinic’s flexible budget and actual operating results for 2020.b. What are the
Why is sign convention important in time value analyses?
What is a lump sum?
What is compounding? What is interest on interest?
What are two solution techniques for solving lump sum compounding problems?
How does the future value of a lump sum change as the time is extended and as the interest rate increases?
What are the two techniques for solving lump sum discounting problems?
How does the present value of a lump sum to be received in the future change as the time is extended and as the interest rate increases?
Why does an investment have an opportunity cost rate even when the funds employed have no explicit cost?
Describe how present values of uneven cash flow streams are calculated using a regular calculator and using a spreadsheet.
What is meant by net present value?
What does the term return on investment mean?
Is the calculation of financial return an application of time value analysis? Explain your answer.
What role does the opportunity cost rate play in calculating financial returns?
What changes must be made in the calculations to determine the future value of an amount being compounded at 8 percent semiannually versus one being compounded annually at 8 percent?
How does the effective annual rate differ from the stated rate?
How does the periodic rate differ from the stated rate?
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs z but it does
Start with the partial model in the file Ch26 P11 Build a Model.xls on the textbook’s Web site. Rework Problem 26-10 using a spreadsheet model. After completing the problem as it appears, answer
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt. Assuming the corporate tax rate is 35%, use the MM model with corporate taxes to
An unlevered firm has a value of $500 million. An otherwise identical but levered firm has $50 million in debt. Under the MM zero-tax model, what is the value of the levered firm?
Start with the partial model in the file Ch25 P09 Build a Model.xls on the textbook’s Web site. Bradford Services Inc. (BSI) is considering a project with a cost of $10 million and an expected life
Answer the following questions.a. Suppose Asset A has an expected return of 10% and a standard deviation of 20%. Asset B has an expected return of 16% and a standard deviation of 40%. If the
Start with the partial model in the file Ch24 P09 Build a Model.xls from the textbook’s Web site. Following is information for the required returns and standard deviations of returns for A, B, and
You are given the following set of data:a. Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X’s beta coefficient.b. Determine the arithmetic average rates of
The standard deviation of stock returns for Stock A is 40%. The standard deviation of the market return is 20%. If the correlation between Stock A and the market is 0.70, then what is Stock A’s
Start with the partial model in the file Ch23 P06 Build a Model.xls on the textbook’s Web site. Use the information and data from Problem 23-5.a. Create a hedge with the futures contract for Zinn
Explain how the futures markets can be used to reduce interest rate risk and input price risk.
Start with the partial model in the file Ch22 P05 Build a Model.xls on the textbook’s Web site. Duchon Industries had the following balance sheet at the time it defaulted on its interest payments
The Verbrugge Publishing Company’s 2010 balance sheet and income statement are as follows (in millions of dollars):Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In
Hager’s Home Repair Company, a regional hardware chain that specializes in “do it yourself” materials and equipment rentals, is cash rich because of several consecutive good years. One of the
Start with the partial model in the file Ch21 P07 Build a Model.xls on the textbook’s Web site. Wansley Portal Inc., a large Internet service provider, is evaluating the possible acquisition of
On the basis of your answers to Problems 21-1 and 21-2, indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition.Data From Problem
Define each of the following terms:a. Synergy; mergerb. Horizontal merger; vertical merger; congeneric merger; conglomerate mergerc. Friendly merger; hostile merger; defensive merger; tender offer;
Start with the partial model in the file Ch20 P06 Build a Model.xls on the textbook’s Web site. Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year
Before entering a formal agreement, investment banks carefully investigate the companies whose securities they underwrite; this is especially true of the issues of firms going public for the first
How do you think each of the following items would affect a company’s ability to attract new capital and the flotation costs involved in doing so?a. A decision of a privately held company to go
Is it true that the “flatter” (more nearly horizontal) the demand curve for a particular firm’s stock and the less important investors regard the signaling effect of the offering, the more
Start with the partial model in the file Ch19 P08 Build a Model.xls on the textbook’s Web site. Maggie’s Magazines (MM) has straight nonconvertible bond that currently yield 9%. MM’s stock
Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 10% and $50 million of straight bonds with a coupon rate of 14%. Both bonds have the same maturity. Does
Start with the partial model in the file Ch18 P06 Build a Model.xls on the textbook’s Web site. As part of its overall plant modernization and cost reduction program, Western Fabrics’s management
One advantage of leasing voiced in the past is that it kept liabilities off the balance sheet, thus making it possible for a firm to obtain more leverage than it otherwise could have. This raised the
Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations and sales to the United States,
Start with the partial model in the file Ch17 P15 Build a Model.xls on the textbook’s Web site. Yohe Telecommunications is a multinational corporation that produces and distributes
Suppose the exchange rate between U.S. dollars and the Swiss franc is SFr1.6 = $1 and the exchange rate between the dollar and the British pound is £1 = $1.50. What then is the cross rate between
Start with the partial model in the file Ch16 P18 Build a Model.xls on the textbook's Web site.Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her bank.
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl’s Doll Shop. Business has been good, but Koehl has frequently run out of cash. This has necessitated late

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