Our group first assessed the value of Community Hospital (CH) using a discounted cash flow (DCF) method. CH is clearly in financial troubles, due in large part due to the large amount of debt they carry. In order to carry out this analysis we made the following assumptions:
Cost of debt is 4%. St. Anywhere Medical Center (SA) is in good financial situation.
Cost of equity is 8.5%
1% risk adjustment.
WACC is 7.43%
Growth rates for year 2 and 3 at 5%. Growth rates for years 3 and 4 at 2%.
No capital expenditures since CH has about half of its beds currently unoccupied.
After completing our DCF analysis for our hypothetical acquisition of CH by SA, we came up with a PV of cash flows of about -$172M. This, plus a $69M debt that CH currently has, leaves us with a Hospital Value for CH of -$241,242,975 using the DCF method.  This clearly does not appear to be a financially responsible acquisition to make.
However, in looking at CH balance sheet, we noticed that CH has a relatively large amount of Total Assets at about $108M. Therefore we calculated the value of CH using a Assets-based method. This would require the liquidation of CH total assets. In determining CH value using this method we would take into consideration depreciation and their total debt of $69M. We would also assume that we would purchase their assets at a 75% discount rate. This would give us a hospital value of $5.4M. We would be willing to pay CH $5.4M in cash and at the same time take ownership of their debt.

RESPONSE to our post - can you help us with responding to the question in the response below:

Now you're talking MY language as far as that price goes. Not sure I agree with the sell off just yet. After all you are getting $82 million in PPE alone for $69 million. All other things being equal, if you could scale down the operating expenses and maybe fill some of those empty beds at CH with sub-acute or other marginal cost business, would your perspective change? CH is getting some money for indigent care from the county and so they have some stakeholder loyalties. Would saving and re-purposing some of that plant perhaps help you long term?

Answer rating: 100% (QA)

All other things being equal if you could scale down the operating expenses and maybe fill some of t... View the full answer