These are approaches to valuation:
Rules of thumb: (twice annual revenues) = $1136 million
2) Adjusted book value: (owner's equity) = $7900 million
3) Discounted cash flow:
Cash flow amount
$655 million (assume same as 2006!)
Although there are many ratios in use, some of the key ratios are formulated and described below:
These two ratios are short-term liquidity ratios. They are calculated to ascertain how well a business is in paying its current liabilities, in case it has to in an emergency situation.
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Determine the revenue variance from Arcadia Hospital's 2005 budget.
Is the variance positive or negative?
Looking only at revenue:
Patient Revenue for '05 = 500 while budget = 550, this means that patient revenue is under budget. Since the focus is on revenue and not costs, under budget is unfavorable, meaning that there was less actual revenue than expected when the budget was created.
Net patient revenue is under budget by 49, unfavorable, less incoming revenue than planned with the budget.
Total Operating Revenue: under budget by 29, unfavorable, less incoming revenue than planned with the budget.
Which is desirable, a positive or negative variance?
When focusing on revenue, it is favorable to be over budget, more actual revenue than planned with the budget. Under budget, would indicate less revenue than budgeted which is unfavorable.
When focusing on costs, it is favorable to be under budget, less actual costs than originally budgeted. It is unfavorable to be over budget, more actual costs than budgeted.
Why? What do you think are some of the possible causes for this variance?
Some possibilities for the revenue shortage could be too much competition from other hospitals, more advertising from other hospitals, and poor level of care from this hospital. Another possibility is low prices.
How would you adjust Arcadia Hospital's 2006 budget in light of your variance analysis?
If the hospital does not expect to take action to increase revenue, then the plan for future years may need to be lowered if they expect diminished revenue streams going forward.
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