Health care is publicly traded corporation

Assignment Help Financial Management

Reference no: EM132007452

It is January 2012. Kimble Health Care is a publicly traded corporation. Kimble is considering opening a pediatric hospital, the financial performance of which will depend on whether the Affordable Care Act (ACA) is determined to be constitutional, which will be decided in June of 2012. Kimble can build the clinics at the start of 2012 at a cost of $940 million. The clinics will generate annual future certain cash flows in perpetuity of $48 million (with the first cash inflow arriving at the start of 2013) if the ACA is determined to be constitutional, and $32 million if the ACA is held to be unconstitutional. Kimble believes that the probability the law will be upheld is 50%. Kimble considers the risk associated with the legal challenge to ACA to be unsystematic, and thus uses the risk-free rate of 4% to discount future cash flows to their present value.

Kimble has the option to wait one year until the constitutional challenge is resolved; Kimble can build the hospital at the start of 2013 at a cost of $940 million, and the future cash flows from building clinics described above are unchanged (with the first cash inflow arriving at the start of 2014). Kimble does not need to raise the $940 million until it is ready to invest.

Should Kimble build the clinics at the start of 2012, or wait until the start of 2013 to decide whether to invest?

Reference no: EM132007452

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