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Case Study 2

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CASE STUDY 2 COMMUNITY GENERAL HOSPITAL I. INTRODUCTION Community General Hospital started in 1914 as Whittaker Memorial Hospital. A man by the name of Dr. Noland Wright was appointed as a manager at that time to review the hospital’s financial records. It turns out that Dr. Wright was trained only in the medical field not business. Unfortunately, he was the main cause for poor financial management at Community General Hospital. By 1970, the hospital had suffered in major losses and debts with a $402,000 budget deficit at the end of 1983. The hospital took drastic steps to alleviate the dire financial situation by laying off employees, refusing non-paying patients and tightening admission criteria. By 1990, the debt was in excess …show more content…

Furthermore, the ROTA figure gives investors an idea of how affectively the company is converting the money it has to invest into net income. The higher the ROTA number, the better, because the company is earning more money on less investment. For 1994, the ROTA of Community General Hospital is roughly 1.14%; however, the hospital has 6.12% of its ROTA. Therefore, the Community General Hospital did a little bit better at converting its investment into profit in the year of 1995 than 1994. B. According to the Z- Score Value (bankruptcy ratio) calculation for Community General Hospital, the firm can be classified as “Failure”. The Z-Value for both years (1994 & 1995) is in negative indicating that it is way below the 1.875. We believe that this hospital is going to be in bankrupt. C. The CAPM uses variation of discounted cash flows; only instead of giving hospital a marginal of safety by being conservative in its earnings estimates. D. With the given cost of capital at 5% the project has a negative NPV of 205,123. Therefore, we should reject the project since the NPV is less than zero or negative. The fraud relates to management embezzlement: -We know that the shareholder’s are not having any wealth at all. -We know the Hospital has no cash. -The financial deficit for the institution increased from ‘94-’95. In its current condition, it should be inoperable and out of service. It should be bankrupt at the

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