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What is the value of the hospital using the free cash flow

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Reference no: EM132635971

Assume that you have been asked to place a value on the acquisition of Briarwood Hospital. Its projected profit and loss statements and retention requirements are shown below (in millions)

                                                    Year 1                     Year 2                   Year 3                      Year 4                           Year 5

Net revenues                       $225.0                     $240.0                  $250.0                $260.0                    $275.0

Cash expenses                     $200.0                       $205.0                   $210.0               $215.0                    $225.0

Depreciation                           $11.0                         $12.0                      $13.0                 $14.0                  $15.0

Earnings before interest and taxes  $14.0                      $23.0                       $27.0                $31.0                   $35.0

Interest                                     $8.0                          $9.0                         $9.0                   $10.0             $10.0

Earnings before taxes                   $6.0                          $14.0                         $18.0                 $21.0             $25.0

Taxes (30 percent)                     $1.80                             $4.20                       $5.40                   $6.30             $7.50

Net profit                                 $4.2                                    $9.8                        $12.6                   $14.7           $17.5

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: What is the value of the hospital using the free cash flow method?

Reference no: EM132635971

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