ENERGY DRINKS VS. STIMULANT DRINKS
October 19, 2020The Purposes of Lawn Care Chicago
October 19, 2020
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| Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its |
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| projected profit and loss statements and retention requirements are shown below (in millions): |
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Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
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| Net revenues |
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$225.0 |
$240.0 |
$250.0 |
$260.0 |
$275.0 |
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| Cash expenses |
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$200.0 |
$205.0 |
$210.0 |
$215.0 |
$225.0 |
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| Depreciation |
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$11.0 |
$12.0 |
$13.0 |
$14.0 |
$15.0 |
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| Earnings before interest and taxes |
$14.0 |
$23.0 |
$27.0 |
$31.0 |
$35.0 |
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| Interest |
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$8.0 |
$9.0 |
$9.0 |
$10.0 |
$10.0 |
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| Earnings before taxes |
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$6.0 |
$14.0 |
$18.0 |
$21.0 |
$25.0 |
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| Taxes (40 percent) |
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$2.4 |
$5.6 |
$7.2 |
$8.4 |
$10.0 |
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| Net profit |
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$3.6 |
$8.4 |
$10.8 |
$12.6 |
$15.0 |
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| Estimated retentions |
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$10.0 |
$10.0 |
$10.0 |
$10.0 |
$10.0 |
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| Briarwood’s cost of equity is 16 percent, its cost of debt is 10 percent, and its optimal capital structure is |
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| 40 percent debt and 60 percent equity. The best estimate for Briarwood’s long-term growth rate is 4 |
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| percent. Furthermore, the hospital currently has $80 million in debt outstanding. |
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| a. What is the equity value of the hospital using the Free Operating Cash Flow (FOCF) method? |
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| b. Suppose that the expected long-term growth rate was 6 percent. What impact would this change have |
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| on the equity value of the business according to the FOCF method? What if the growth rate were |
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| only 2 percent? |
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| c. What is the equity value of the hospital using the Free Cash Flow to Equityhloders (FCFE) method? |
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| d. Suppose that the expected long-term growth rate was 6 percent. What impact would this change have |
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| on the equity value of the business according to the FCFE method? What if the growth rate were |
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| only 2 percent? |
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