3. You have been called in to value a dental practice by an old friend and...
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3. You have been called in to value a dental practice by an old friend and have been provided with the following information: • The practice generated pre-tax income of $ 600,000 last year for the dentist, after meeting all office expenses. The income is expected to grow at 2.5% in perpetuity, with no reinvestment needed. The tax rate is 22%. • The dentist currently spends about 20 hours a week doing the accounting and administrative work. You estimate that hiring an external accounting service will cost you $35,000 annually. As an alternative to private practice, the dentist could work at a dental hospital nearby at an annual salary of $ 165,000. (Neither was considered when estimating the income above) The office is run out of a building owned by the dentist. While no charge was assessed for the building in computing the income, you estimate that renting the space would have cost you $120,000 a year. • The unlevered beta for a company of this size, industry, risks, and geography is 1.90. The dental practice has no debt. (You can use a riskfree rate of 3.00% and a risk premium of 5.50%). a. Estimate the cost of capital that you would use in valuing this practice. b. Estimate the value of the practice for sale in a private transaction. 3. You have been called in to value a dental practice by an old friend and have been provided with the following information: • The practice generated pre-tax income of $ 600,000 last year for the dentist, after meeting all office expenses. The income is expected to grow at 2.5% in perpetuity, with no reinvestment needed. The tax rate is 22%. • The dentist currently spends about 20 hours a week doing the accounting and administrative work. You estimate that hiring an external accounting service will cost you $35,000 annually. As an alternative to private practice, the dentist could work at a dental hospital nearby at an annual salary of $ 165,000. (Neither was considered when estimating the income above) The office is run out of a building owned by the dentist. While no charge was assessed for the building in computing the income, you estimate that renting the space would have cost you $120,000 a year. • The unlevered beta for a company of this size, industry, risks, and geography is 1.90. The dental practice has no debt. (You can use a riskfree rate of 3.00% and a risk premium of 5.50%). a. Estimate the cost of capital that you would use in valuing this practice. b. Estimate the value of the practice for sale in a private transaction.
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a To estimate the cost of capital we need to first calculate the cost of equity and the weighted ave... View the full answer
Related Book For
Advanced Financial Accounting
ISBN: 978-0132928939
7th edition
Authors: Thomas H. Beechy, V. Umashanker Trivedi, Kenneth E. MacAulay
Posted Date:
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