1. Is profit maximization the same thing as shareholder wealth maximization? Why or why not?
2. Describe the primary distinction between prospective payment and retrospective payment.
Provide detailed descriptions and show all calculations used to arrive at solutions for the following questions:
1. Your firm has $45.0 million invested in accounts receivable, which is 90 days of net revenues. If this value could be reduced to 50 days, what annual increase in income would your firm realize if the increase in cash could be invested at 7.5 percent?
Use the following information to answer questions 2, 3, and 4:
You have been asked to establish a pricing structure for radiology on a per-procedure basis. Present budgetary data is presented below:
| Number of Budgeted Procedures | 10,000 |
| Budgeted Cost | $400,000 |
| Desired Profit | $ 80,000 |
It is estimated that Medicare patients comprise 40 percent of total radiology volume and will pay on average $38.00 per procedure. Approximately 10 percent of the patients are cost payers. The remaining charge payers are summarized below:
| Payer | Volume % | Discount % |
| Blue Cross | 20 | 4 |
| Unity | 15 | 10 |
| Kaiser | 10 | 10 |
| Self-Pay | 5 | 40 |
| 50% |
Your supervisor recommends the following method to set the rate per procedure in order to generate the required $80,000 in profit:
Weighted Discount = (0.4 × 0.04) + (0.30 × 0.10) + (0.20 × 0.10) + (0.10 × 0.40)
= 0.106
Price = ($400,000 ÷ 10,000) + [($80,000 + 4,000 ($40.00 – $38.00)) ÷ 5,000]
1 – 0.106
=($40.00 + $17.60)/.894 = $64.43
2. If the forecasted volume increased to 12,000 procedures and budgeted costs increased to $440,000, while all other variables remained constant, what price should be established?
3. Assume that the only change in the original example data is that Blue Cross raises their discount to 20 percent. What price should be set?
Thoroughly answered all of the questions: 60 points possible
Spelling/Grammar at the college level: 20 points possible
References to course material: 20 points possible
Total: 100 points
3rd
Provide detailed descriptions and show all calculations used to arrive at solutions for the following questions:
1. Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lockbox arrangement that promises to cut the six days to one day. If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month.
2. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?
3. Your firm is considering the following three alternative bank loans for $1,000,000:
a) 10 percent loan paid at year end with no compensating balance
b) 9 percent loan paid at year end with a 20 percent compensating balance
c) 6 percent loan that is discounted with a 20 percent compensating balance requirement
Assume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan?
4. An important source of temporary cash is trade credit, which does not actually bring in cash, but instead slows its outflow. Vendors often provide discounts for early payment. What is the formula to determine the effective interest rate if the discount is not utilized?
Upload your answers by 11:59 PM eastern Time on Sunday. (Click the “Week 4 Homework Assignment” link below to upload).
Assignment Grading Criteria:
Thoroughly answered all of the questions: 60 points possible
Spelling/Grammar at the college level: 20 points possible
References to course material: 20 points possible
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