Reference no: EM131233607

You do not need to write a memo. Instead, answer the questions below.

Read Case: St. Benedict's Teaching Hospital.

1. Use the data contained in the case to estimate the post-merger cash flows for 2014 through 2018 assuming that Lafayette General Hospital is acquired by St. Benedict's Teaching Hospital. (Note that you have very limited data on which to base your forecasts. The key is to make supportable assumptions about the potential synergies that can be obtained from the merger. Also, note that any cost savings to St. Benedict's that result from the merger must be included in the analysis.) (Hint: Use embedded interest expense in your forecast, but do not include any interest to fund the acquisition.  That means you should input values for interest on current debt but ignore values for interest on required loans. This is because you have not yet establish the purchase price.  Once you do establish that price and pursue merger, interest expenses for required loans will change.) 

a. Paste your Lafayette General Hospital Pro Forma Forecasted Cash Flow statement below.

b. What value did you choose for the growth rate for inpatient revenues? Why?

c. What value did you choose for the growth rate for outpatient revenues? Why?

d. What value did you choose for the long term growth rate?  Why?

e. What value did you choose for patient service expenses as a percent of net patient revenue and why?

f. What share of cash flows would be retained for growth (i.e. Invested in Lafayette rather than available to investors)? Why?

2. Conceptually, what is the appropriate discount rate to apply to the cash flows obtained in Question 1? What is your estimate of the acquisition value to St. Benedicts using the cash flow method? Do you have much confidence in it? This is a brief essay answer justifying your choice of a discount rate

3. Excluding the discount rate, what are the 2 most critical assumptions (from 1b-1f) you made in generating these cash flow estimates?  Holding your assumed discount rate constant, identify the change in your cash flows that would result if you are off in your assumptions by +/- 30% for these two values.    The best way to calculate this is a sensitivity analysis using a 'what if' table.  What does it tell you about the assumptions you are making?

4. What is your estimate of Lafayette General's value using the market multiple valuation technique? What are the strengths and weaknesses of this technique both in general and as applied in this situation? (Remember that there are two bases for this approach, EBITDA and number of discharges.)

5. What is your final conclusion regarding the value of Lafayette General to St. Benedict's? How much should St. Benedict's initially offer for Lafayette General?  What should their target price and their BATNA be?  Why did you choose each number?

6. Assume the hospital is acquired at St. Benedicts target price.  How much of the acquisition would need to be financed with a loan?   (Hint:  Look at the balance sheet and ratios of St. Benedicts to help identify cash available for such a purchase.)  Assuming that, as a non-profit, St. Benedicts can issue tax exempt bonds, what would be the assumed interest rate for such bonds? Input that interest into the spreadsheet "interest on required loans."  How does that affect the cash flows from the purchase?  Does this materially change your answer to 5 (above)?

7. Assume the for profit competitor in the market is likewise evaluating Lafayette for a purchase.  How would their analysis be different than the analysis of St. Benedict?  

8. What are the most important qualitative considerations for considering this merger?  What are the most important qualitative considerations for implementing a merger once the acquisition has been finalized to address questions 1 and 2 on pages 154/155 regarding the acquisition?

Attachment:- Assignment.rar