1 PROBLEM 2 2 3 Assume that you have been asked to place a value on...

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1 PROBLEM 2 2 3 Assume that you have been asked to place a value on the fund capital (equity) of BestHealth, a 4 not-for-profit HMO. Its projected profit and loss statements and retention requirements are 5 shown below (in millions): 6 7 8 Net revenues 9 Cash expenses 10 Depreciation 11 Interest 12 Net profit 13 Year 1 Year 2 Year 3 Year 4 Year 5 $57.0 $60.0 $50.0 $52.0 $54.0 $45.0 $46.0 $47.0 $48.0 $49.0 $3.0 $3.0 $4.0 $4.0 $4.0 $1.5 $1.5 $2.0 $2.0 $2.5 $0.5 $1.5 $1.0 $3.0 $4.5 14 The cost of equity of similar for-profit HMO's is 14 percent, while BestHealth's cost of debt is 5 15 percent. Its current capital structure is 60 percent debt and 40 percent equity. The best estimate 16 for BestHealth's long-term growth rate is percent. Furthermore, the HMO currently has 17 $30 million in debt outstanding. 18 19 What is the value of the HMO using free cash flows? 20 1 PROBLEM 2 2 3 Assume that you have been asked to place a value on the fund capital (equity) of BestHealth, a 4 not-for-profit HMO. Its projected profit and loss statements and retention requirements are 5 shown below (in millions): 6 7 8 Net revenues 9 Cash expenses 10 Depreciation 11 Interest 12 Net profit 13 Year 1 Year 2 Year 3 Year 4 Year 5 $57.0 $60.0 $50.0 $52.0 $54.0 $45.0 $46.0 $47.0 $48.0 $49.0 $3.0 $3.0 $4.0 $4.0 $4.0 $1.5 $1.5 $2.0 $2.0 $2.5 $0.5 $1.5 $1.0 $3.0 $4.5 14 The cost of equity of similar for-profit HMO's is 14 percent, while BestHealth's cost of debt is 5 15 percent. Its current capital structure is 60 percent debt and 40 percent equity. The best estimate 16 for BestHealth's long-term growth rate is percent. Furthermore, the HMO currently has 17 $30 million in debt outstanding. 18 19 What is the value of the HMO using free cash flows? 20