# HMGT 322 Week 3 - Health Care Management Accounting Questions

6.1- The housekeeping services department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had \$100,000 in direct costs during 2011. These costs must be allocated to Rugaer's three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: using the direct method. Two cost drivers are under consideration: patient services departments generated \$5 million in total revenues during 2011, and to support these clinical activities, they used 5,000 hours of housekeeping services.

a. What is the value of the cost pool?
b. What is the allocation rate if
•    Patient services revenue is used as the cost drivers?

•    Hours of housekeeping services is used as the cost driver?

6.2- Refer to Problem 6.1. Assume that the three patient services departments are adult services, pediatric services, and other services. The patient services revenue and hours of housekeeping services for each department are:

Department-Revenue-Housekeeping Hours
Pediatric Services 1,500,000 3,000
Other Services 500,000 500
Total \$5,000,0005,000

a. What is the dollar allocation to each patient services department if patient services revenues used as the cost driver?
b. What is the dollar allocation to each patient services department if hours of housekeeping support are used as the cost drivers?
c. What is the difference in the allocation to each department between the two drivers?
d. Which of the two drivers is better? Why?

(The following data pertain to problem 6.3- 6.6)

St. Benedict’s Hospital has three support department and four patient services departments. The direct costs to each of the support departments are:

Facilities \$5,000,000
Financial Service\$3,000,000

Selected data for the three support and four patient services departments are:

Dept.-Patient Service-Space-Housekeep-Salary
Revenue (sq. feet) Labor Hr. Dollars
General- 10,000-2,000-\$1,500,000

Facilities-- 20,000- 5,000-\$3,000,000
Financial Services-15,000 - 3,000- \$2,000,000
Total - 45,000 - 10,000 -\$6,500, 000

Patient Service:

Routine Care \$30 million-400,000- 150,000-12 m
Intensive care 4 m- 40,000- 30,000- 5 million
Diagnostic Serv. - 6m- 60,000-15,000- 6 million
Other Serv. - 10 million-100,000-25,000- 7 million
Total \$50,000,000- 600,000-220,000- 30 million
Grand Total - \$50,000,000- 645,000-230,000- \$36,500,000

6.3- Assume that the hospital uses the direct method for cost allocation. Furthermore; the cost driver for general administration and financial services is patient services revenue, while the cost driver for facilities is space utilization.

a. What ate the appropriate allocation rates?
b. Use an allocation table similar to Exhibit 6.7 to allocate the hospital's overhead costs to the patient services departments.

6.4- Assume that the hospital uses salary dollars as the cost driver for general administration, housekeeping labor hours as the cost driver for facilities, and patient services revenue as the cost driver for financial service. (The majority of the costs of the facilities department stem from the provision of housekeeping services.)

a. What are the appropriate allocation rates?
b. Use an allocation table similar to the one used to problem 6.3 to allocate the hospitals overhead costs to the patient services departments
c. Compare the dollar allocations with those obtained in problem 6.3 Explain the differences.
d. Which of the two cost driver schemes is better? Explain your answer.

11.1- Assume Venture Healthcare sold bonds that have a 10 year maturity,

a 12 percent coupon rate with annual payments, and a \$1,000 par value.
a. Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent. what would be the bonds' value?
b. Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. What would be the bonds' value?
c. What would be there value of the bonds three year after issue in each scenario above, assuming that interest rates stayed steady at either 7 percent or 13 percent?

11.2- Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturity. The par value of the bond is \$1,000, and the bond pays income interest annually.

a. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return.
b. Now, suppose Twin Oaks' four your bond had semiannual coupon payments. What would be its current value? (Assume a 7 percent semiannual required rate of return. However, the actual rate would be slightly less than 7 percent because a semiannual coupon bond is slightly less risky than an annual coupon bond.)
c. Assume that Twin Oaks' bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Again, assume a 7 percent semiannual required rate of return, although the actual rate would probably be greater than 7 percent because of increased price risk.)

11.5- Minneapolis Health System has bonds outstanding that have four years remaining to maturity, a coupon interest rate of 9 percent paid annually, and a \$1,000 par value.

a. What is the yield to maturity on the issue if the current market price is \$829?
b. If the current market price is \$1,104?
c. Would you be willing to buy one of these bonds for \$829 if you required a 12 percent rate of return on the issue? Explain your answer.

11.6- Six years ago, Bradford Community Hospital issued 20 years municipal bonds with a 7 percent annual coupon rate. The bonds were called today for a \$70 call premium-that is, bondholders received \$1,070 for each bond. What is the realized rate of return for those investors who brought the bonds for \$1,000 when they were issued?

12.1- A person is considering buying the stock of two home health companies that are similar in all respects except the proportion of earnings paid out as dividends. Both companies are expected to earn \$6 per share in the coming year, but Company D (for dividends) is expected to pay out the entire amount as dividends, while Company G (for growth) is expected to pay out only one-third of its earnings, or \$2 per share. The companies are equally risky, and their required rate of is 15 percent. D's constant growth rate is zero and G's is 8.33 percent. What are intrinsic values of stocks D and G?

12.2- Medical Corporation of America (MCA) has a current stock price of \$36 and its last dividend (D0) was \$2.40. In view of MCA's strong financial position, its required rate of return is 12 percent. If MCA's dividends are expected to grow at a constant rate in the future, what is the firm's expected stock price in five years?

12.3- A broker offer to sell you shares of Bay Area Healthcare, which just paid a dividend of \$2 per share. The dividend is expected to grow as a constant rate of 5 percent per year. The stocks' required rate of return is 12 percent.

a. What is the expected dollar dividend over the next three years?
b. What is the current value of the stock and the expected stock price at the end of each of the next three years?
c. What is the expected dividend yield and capital gains yield for each of the next three years?
d. What is the expected total return for each of the next three years?
e. How does the expected total return compare with the required rate of return on the stock? Does this make sense? Explain your answer.

12.7- Lucas Clinic's last dividend (Do) was \$1.50. Its current equilibrium stock price is \$15.75, and its expected growth rate is a constant 5 percent. If the stockholders' required rate of return is 15 percent what is the expected dividend yield and expected capital gains yield for the coming year?