Problem 4 Problem 3 Problem 2 Problem 1 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Net revenues Cash expenses Depreciation Earnings before interest and taxes Interest Earnings before taxes Taxes (40 percent) Net profit Estimated retentions ANSWER Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profit and loss statements and retention requirements are shown below (in millions): Briarwood’s cost of equity is 16 percent, its cost of debt is 10 percent, and its optimal capital structure is 40 percent debt and 60 percent equity. The best estimate for Briarwood’s long-term growth rate is 4 percent. Furthermore, the hospital currently has $80 million in debt outstanding. PROBLEM 1 PROBLEM 2 Chapter 16 — Business Valuation, Mergers, and Acquisitions b. Suppose that the expected long-term growth rate was 6 percent. What impact would this change have only 2 percent? on the equity value of the business according to the FOCF method? What if the growth rate were a. What is the equity value of the hospital using the Free Operating Cash Flow (FOCF) method? c. What is the equity value of the hospital using the Free Cash Flow to Equityhloders (FCFE) method? d. Suppose that the expected long-term growth rate was 6 percent. What impact would this change have only 2 percent? on the equity value of the business according to the FCFE method? What if the growth rate were PROBLEM 3 of only 20 percent in taxes during the last several years. In addition, it uses little debt, having a debt of dollars): Year 5 and beyond Constant growth at 6% and its cost of debt is 10 percent. The risk-free rate is 8 percent. equity to determine the market risk premium.) Free Cash Flows to Equityholders wholly owned subsidiary. Columbia would pay taxes on a consolidated basis, and the tax rate would subsidiary to 40 percent of assets, which would increase its beta to…
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